But the negatives extend beyond these areas. When households and individuals are forced into default conditions or bankruptcy, those borrowers are then unable to establish strong credit histories and make large purchases (in areas like housing or automobiles, for example). When consumers are unable to make the real purchases that drive the economy, overall growth rates suffer. This is likely to be true now especially, given the fact that there will not be as much added monetary stimulus injected at the Fed.
Trends in Debt Allocation
In order to begin reversing these trends, we first have to look at the places in which this debt has been accumulated. According to this series of infographics, the main trends can be found in four central areas: Mortgages, credit card debt, automobile purchases and student loans.
Not surprisingly, the major portion of this total can be found in the mortgage space, with more than two-thirds of the total household debt ($8.7 trillion) centered in home loans. And while this figure might sound alarming to some, mortgage debt should actually be viewed as "healthy debt" that allows the American consumer to build net worth and a more solid financial base.
Since mortgage debt is a long term commitment, the simple fact that a household is able to accrue debt in this area means that there is a stable financial footing and that the household is consistently able to meet its monthly payment obligations. Debt in major automobile purchases has some of the same characteristics, but to a lesser extent. The main point here is that debt associated with major purchases is much less of a concern when we look at the bigger picture. If anything, this type of debt suggests the ability to make the key purchases necessary to drive overall growth and keep the economy running in a normal fashion.
The real concern lies in debt in the other major areas. Here, we are talking about the long term trends in consumer credit card debt and in student loans.
By its very nature, consumer credit card debt is destructive in nature when revolving balances are held. This is the case for a few different reasons. First, credit card debt tends to be associated with much higher interest rates when compared to more stable debt, like those seen with traditional mortgage agreements. This creates debt burdens for consumers that are much more substantial when balances are not repaid in full each month.