05/03/2013 03:03 pm ET Updated Dec 06, 2017

Are Consumers Afraid of Debt Now?

A recent publication out from the Federal Reserve appears to indicate consumers have learned to cut back on debt, at least for now.

The reduction might be to a number of events and not just the sudden realization that too much debt is problematic. For example, people may be feeling less confident about the future and that's driving their spending. Or maybe easy credit is just less available and the banks have turned down the spigots of credit.

No matter what the reason, the result is household debt is down by $1.3 trillion since the start of the recent financial crisis. And the data suggests the decline was accelerating in the third quarter of 2012.

For consumers this might be great news. For debt relief companies that offer help with problem debt, this is bad news. Less debt creates less demand for their services.

Consumers that are still carrying debt are doing a better job of staying current with their payments and are rebounding to pre-crisis levels.

Overall delinquencies by credit type also show a decline.

And consumer bankruptcies rose with foreclosures.

The Federal Reserve addressed the issue of the reduction in consumer debt. The drivers of this seem to be frequently in dispute. Debt relief companies say the numbers are down because creditors have charged off debts but others say it is because consumers have learned a lesson about managing debt.

The Federal Reserve said, "But in looking at the recent date it appears the reduction in consumer nonmortgage debt is actually not from continued charge-off from bad debts but from a lower consumer reliance on nonmortgage debt.

Credit by type has also remained flat as well. If we just look at the number of accounts by type you can see the number of credit card took a big hit in 2008, at the same time as the most recent bankruptcy peak and has remain flat since.

The data about new installment accounts shows a little growth, but certainly nothing to lead us to believe there is a rebound in credit in the near future.

"Quarterly account openings had fallen nearly 40 percent, from a peak of roughly 250 million in each quarter from third-quarter 2005 to third-quarter 2007, to 158 million in third-quarter 2010. Since then, the number of account openings has increased modestly, to 177 million, but remains well below its peak sustained levels," said the Federal Reserve.

Additional data suggests that the drop in new accounts isn't just creditors turning people away but a decreased interest in consumers to apply for new credit. Follow the green line in the chart below.

The credit report inquiries series in Chart 8 (green line) tracks the new account series quite closely. As the twelve-month rate of new account openings falls by more than a third from its 2005-07 plateau of around 250 million to a low of 158 million in third-quarter 2010, the rate of inquiries quite similarly drops from a plateau of around 240 million inquiries per six-month period from 2005-07 to a second-quarter 2010 low of 150 million inquiries, before bouncing back slightly and stabilizing at around 165 million inquiries--very near the twelve-month account openings level during the last two years of data. The available evi- dence suggests that fewer applications for credit from borrowers contributed to the decline in new account openings.

Credit card balances have declined faster since 2010 than credit card limits decreased, suggesting consumers are paying down debt by want rather than demand.

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