Study warns consumer debt may reach $1 trillion

Could omnichannel shopping be turning consumers into omnivorous spenders? A new study by CardHub published Jun. 8, 2016, highlights rising debt levels in the United States and questions the sustainability of current spending habits.

U.S. consumers repaid $26.8 billion in debt in the first quarter of 2016, the "smallest first-quarter pay-down since 2008 and nearly 25 percent below the post-recession average," the report stated, adding that the pay-down eliminated only 38 percent of the $71 billion in debt accumulated in 2015. The study compared 2016 and 2007 behavior patterns, finding similarities in pay-down percentages and charge-offs during both periods.

"U.S. consumers began a process of deleveraging after 2008; this data shows that trend may be reversing," said Kate Hao, founder and Chief Executive Officer of Happy Mango Inc, a credit scoring and finance management service. "Despite the very low delinquency rates at the moment, lenders or businesses that are exposed to consumer credit risk should start thinking about preparing for the downturn of the credit cycle."

Banks and credit unions need to take a proactive approach to determine if they have the right risk surveillance tools to detect potential spikes in delinquency and make any necessary adjustments to their credit risk appetites, Hao added.

Consumer best practices

CardHub provides free guidance, reviews and information about a variety of credit card products and consumer best practices. CardHub founder and CEO Odysseas Papadimitriou, a former consumer lending and marketing executive, wanted to use his payments industry expertise to help consumers be more informed about financial services and have better control of their credit. The service includes a credit card search tool, help center, credit score estimator, credit card debt center and reviews of top-rated credit cards.

The company's consumer debt report urged consumers to monitor spending and follow these simple guidelines:

• Make a budget (and stick to it): The authors recommended rank ordering expenses such as debt payments, emergency fund contributions, and other savings ‒ and trimming fat wherever possible.

• Build an emergency fund: The goal should be to gradually save about a year's worth of after-tax income through monthly contributions to an emergency account.

• Improve credit score: Improving credit standing will generally reduce the cost of debt and, thus, how quickly you can pay it off. Better credit also makes it easier to find a job or a place to live, the authors wrote.

• Try the island approach: The island approach is a credit card strategy that involves using different cards for different types of transactions, as if they are a chain of distinct yet interrelated islands. "This will enable you to get the best possible collection of terms [and] better perspective on your spending and payment habits," CardHub stated.

• Use the snowball method: The authors recommended strategically paying down balances with the highest interest rates and making the minimum payment required on the rest.

• Evaluate your job situation: In some cases, it may be necessary to evaluate whether higher-paying opportunities exist, the authors noted.

The full report can be found at www.cardhub.com/edu/credit-card-debt-study .

Additional resources

A growing array of technology startups are offering free guidance and personal financial management tools to consumers. Happy Mango helps consumers track expenses, forecast cash flows and set and meet financial goals. Consumers can opt in to the free service to obtain an alternative credit score based on their spending and saving patterns and an assessment of their overall financial health. They also have access to third-party financial products and services designed to improve their long-term financial health.

Hedgeable, a New York-based automated investing platform, enables individual investors to obtain tailored investment portfolios that reflect their personal goals. Additional benefits include a loyalty program and the option to invest in digital currencies. Designed to offer all clients a highly personal wealth management experience, Hedgeable requires no minimum investment and includes a risk management system designed to minimize losses.

"We didn't start Hedgeable because the world needed robots; we started Hedgeable because the carnage of the financial crisis showed that the gap between the haves and the have nots in regards to financial product access was immense," wrote Hedgeable blogger Michael Kane. "Startups have raised billions of dollars in venture capital in all areas of financial services, and the public has been rewarded with fantastic innovation in areas such as digital currency, micro-payments, non-bank lending, and crowdfunding."

The proliferation of emerging payment technologies has facilitated shopping via phones, tablets, desktops and even virtual storefronts, making it easier than ever for consumers to overspend. CardHub, Happy Mango and other consumer advocates have suggested that spending habits and social behaviors will be an integral part of credit scoring in the future, making it even more important for consumers to adopt a disciplined, vigilant approach to saving and spending.

This is important for the payments industry, as well, because all players in the acquiring chain are dependent upon consumers' long-term financial health.

Editor's Note:

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