Consumer Debt Continues to Drop


NEW YORK (TheStreet) -- Consumer debt continued to shrink last quarter, according to a new report by the Federal Reserve Bank of New York.

At the end of the third quarter, consumer debt totaled $11.6 trillion, down $922 billion, or 7.4%, from its peak level two years earlier and a decline of 0.9% from the second quarter, says the quarterly report on household debt and credit.

Excluding mortgage and home equity lines of credit (HELOC) balances, consumer indebtedness fell 0.3% last quarter to $2.3 trillion, the report says.

During the third quarter, the number of new bankruptcies dropped 16% sequentially, yet still rose 1% compared to the year-earlier period, to 522,000.

The financial crisis of the last few years and resulting economic recession placed a crimp on consumer spending habits. The last decade saw consumers using record levels of leverage, facilitated by low-interest or temporary no-interest credit card loans, mortgages with loan to value ratios of up to 110% and other forms of credit.

The addition of record high unemployment has caused retail banks and credit card lenders including Bank of America , JPMorgan Chase , Citigroup as well as Capital One , American Express and others to feel the pain as consumers were unable to pay their bills.

Credit cards have been the primary source of debt reduction over the past two years.

Consumers continued to shore up their credit accounts last quarter, albeit at a slower rate of decline, the New York Fed says.

"Consumer debt is declining but only part of the reduction is attributable to defaults and charge-offs," says Donghoon Lee, senior economist at the New York Fed. "Americans are borrowing less and paying off more debt than in the recent past. This change, which we continue to study carefully, can be a result of both tightening of credit standards and voluntary changes in saving behavior."

The number of open credit card accounts at the end of the third quarter was down 24% from a peak in the second quarter of 2008. However, the number of credit account inquiries within six months - an indicator of consumer credit demand - rose for the second quarter in a row, the report says.

In terms of mortgage borrowing, household mortgage indebtedness has declined 7.4%, while home equity lines of credit are down 5.7% since their peaks in the third quarter of 2008 and first quarter of 2009, respectively, the report says.

Approximately 457,000 individuals received home foreclosure notices between July 1 and September 30, up 5.5%, but down 6.4% from a year earlier, likely due to the temporary moratoriums implemented by several large banks, amid the latest housing crisis.

Still, 11.1% of household debt was in some stage of delinquency, roughly flat with the comparable periods, the report says.


About 2.7% of current mortgage balances moved into delinquency status last quarter, the first deterioration in this figure since last year, the report adds.

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