The total percentage of household income being spent on debt payments has gone down in 2012, according to data released recently by the Federal Reserve. On average, households in the United States are spending just under 11 percent of their after-tax income making payments on their debt, which is the lowest rate since 1983.
Experts say that the decrease in household debt is largely due to voluntary and involuntary deleveraging. This means that debt is being restructured, people are pursuing loan modifications, and foreclosures and bankruptcy proceedings are removing and restructuring large amounts of debt from household balance sheets.
Particularly for families who have faced an involuntary deleveraging such as a foreclosure or other type of repossession, this process can be very painful and difficult. However, spending less on debt payments means that each paycheck can stretch a little further, allowing many families to finally stop accumulating credit card debt or struggle with being behind on payments for other loans.
Research also shows that when debt decreases, consumer spending rebounds. “For every dollar they save on servicing their debts, they will probably go and spend that money elsewhere on other goods and services,” said an economist at the Capital Economics research firm.
The net result is that the economy has room for improvement when households aren’t spending all of their money on debt payments. However, many cautious borrowers are smart to focus on saving for a rainy day while they have their debt in check, which does less good for overall economy but is certainly more beneficial to families.
Source: Wall Street Journal, “Consumers Climb Out of Debt,” Ben Casselman, Dec. 23, 2012.
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