In the wake of the financial crisis, one bit of good news was that Americans began to pay down their household debts, which were reaching unsustainable heights during the preceding years. As the New York Times reported in a recent article, total household debt reached a peak of $12.7 trillion before the crisis. This included increasing credit card, auto loan, mortgage and student loan debt. It was not until the economic downturn got underway that debt fell to $11.2 trillion.
However, it appears that the trend of paying off debt is ending. Now, Americans appear ready to borrow more. As the news source reports, Americans added $241 billion in household debt in the fourth quarter of last year, marking a 2.1 percent increase. The majority of this debt was driven by student loans, which increased by $53 billion.
Opinions on whether this is a good thing or a bad thing differ.
“Good or bad, it’s hard to say,” Wilbert van der Klaauw, senior Vice President and economist at the New York Federal Reserve branch, told the news source. “In a steady state you would expect, in nominal terms, household debt to grow.”
It is true that increasing consumer spending is a sign of an economic recovery, and household debt tends to go hand in hand with this spending. However, some economists have worried that job growth is not steady enough to support this borrowing. Retail analyst David Strasser, for example, told the news source that the debt-to-income ration is still higher than it typically was historically.
This means that many consumers may not be able to afford the debt they are seeking. For this reason, lenders should protect themselves by using credit risk management software to determine which applicants can be expected to make timely payments.
