Consumer debt rises to $14.3 trillion, now higher than 2008 crisis

A new report indicates that total consumer debt today is $1.6 trillion morein nominal terms, than the previous peak of $12.68 million during the 2008 financial crisis.

Here’s what you need to know.

consumer debt

Total household debt rose by $155 billion, or 1.1%, in the first quarter of this year, according to a new report of the Federal Reserve Bank of New York. However, this data, which is up to March 31, 2020, is likely does not include the full impact of Covid-19 pandemic, which could show a larger increase in total consumer debt. The last two weeks of March are probably not included, as credit account data is updated monthly. What is the distribution of debt in certain categories during the first quarter of 2020 and what does this mean for you? Here’s an overview, plus some comments and insights.

Mortgages

  • Mortgages are the highest category of consumer debt.
  • Total mortgage debt increased to $9.7 trillion.
  • About 0.9% of mortgages have become delinquent for 30 days or more.
  • About 75,000 received a foreclosure rating on their credit report.
  • The median credit score for new mortgage borrowers was 773, which represents an increase of 14 points from the previous year.

Remark: As credit standards tighten, borrowers may find it harder to qualify for mortgages and refinances, especially for jumbo mortgages. With more than 33 million unemployed, expect an impact on the housing market in the coming quarters.

What this means for you: If you’re borrowing or refinancing a mortgage, expect tougher underwriting standards, which could make it harder to qualify if you have a lower credit score. There is also other ways to get money during COVID-19.


Home Equity Lines of Credit (HELOC)

  • HELOCs decreased by $4 billion

Remark: It will be increasingly difficult for homeowners to leverage the equity in their homes. Several banks, including Wells Fargo

WFC
and JPMorgan

JPM
have stopped accepting new HELOC requests as a result of COVID-19.

What this means for you: It may be much more difficult, but not impossible, to obtain a HELOC during the COVID-19 pandemic.


Student loans

  • 10.8% of total student loan debt is past due or in default for more than 90 days.

Remark: Until September 30, 2020, federal student loan repayments are suspended, federal interest rates are 0%, and there are no federal debt collection on student loans. After September 30, once these temporary student loan benefits are lifted, delinquency and default rates may increase if the economy continues to deteriorate.

What this means for you: If you’re struggling financially, enroll in an income-based repayment plan for your federal student loans. If you have additional resources, refinance your student loans and consider making an additional payment.


Credit card

  • Credit card balances down $34 billion

Remark: Credit card spending typically plummets after the holiday season. However, the decline in credit card spending also reflects COVID-19 as consumers halt non-essential purchases. While the report says credit limits have increased by $34 billion, credit card issuers have reportedly been lowering lines of credit for certain borrowers to avoid future defaults and mitigate risk during this difficult economic period.

What this means for you: Proceed with caution with credit cards during this time. Pay your credit card balance in full and on time. Credit card debt has high interest rates, which can hurt you, especially during a time of high unemployment. If you can’t make your monthly payment, don’t use a credit card. If you have credit card debt, consider credit card consolidation to get a lower interest rate and save money.


Next steps

The effects of the COVID-19 pandemic will be reflected most strongly in second quarter data, which will cover April, May and June. Things to watch include trends in chargebacks, defaults and bankruptcies, although this may take longer than a quarter to materialize. Consumer spending by credit cards will likely be suppressed for at least part of the second quarter. Watch the housing market. Be sure to avoid worst ways to pay student loans during COVID-19.


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