According to a news report published recently by the Federal Reserve, consumers acquired a large amount of credit card debt during the month of November.
Revolving debt, which is usually credit cards, saw a large 8.5% increase during November, and non-revolving debt such as student and car loans saw a larger increase of 10.7%. According to the report, American consumers now carry $2.48 trillion in debt, without counting mortgages.
University of Illinois law professor Robert Lawless says “Yes, that’s a big jump. More common increases are about 2%.”
This comes as a sort of stabilizing for the borrowing/lending market, after consumer revolving credit falling by 9.6% in 2009, and by 7.5% in 2010. There was roughly a 1% increase in October, and then this large increase in November.
Many people will think this is an inherently bad sign, but according to Lawless, this is actually a good thing. He says that increases in consumer credit tend to cause fewer bankruptcy filings. The latest findings tend to agree with Lawless, with the November increase in credit immediately followed by a much larger than usual decrease in bankruptcies. For the month of December, compared to 2010, the number of filings for 2011 is down by over 12%.
When asked about this strange turn of events, Lawless said “I’m not entirely sure why that is, but my supposition is that more people are able to borrow as an alternative to bankruptcy.”
If Lawless is correct, then the problem with this solution is that it is merely temporary. Relying on debt to make it through current bills is a dangerous position to be in. Traditional research shows a few years after increases in consumer credit, bankruptcies once again start rising.
Lawless had this final comment on the increase: “That’s the paradox of consumer credit. In the short run, bankruptcy does go down when credit goes up. But bankruptcy takes time and money. So over time, bankruptcies will eventually rise.”
Please see the IRS report here: http://www.federalreserve.gov/releases/g19/Current/