Consumer Debt: Storm Clouds on the Horizon?


ST. LOUIS — Credit cards and payday loans can provide short-term convenience for some people, but consumers' shift toward greater debt could have a long-term, negative impact on the U.S. economy.

That's one point emphasized by research analyst Kristie M. Engemann and economist Michael T. Owyang in the April issue of The Regional Economist, the quarterly journal of business and economic issues published by the Federal Reserve Bank of St. Louis. The publication is also available online at:

The 2004 Survey of Consumer Finances (SCF) showed that the percentage of families holding debt rose from more than 72 percent in 1989 to just over 76 percent in 2004. The median value of the debt more than doubled during that time, from $22,000 to more than $55,000.

Engemann and Owyang noted that 56 percent of American families in 1989 owned at least one credit card. By 2004, that figure jumped to almost 75 percent. The authors' analysis shows that a higher percentage of single people and renters now have a credit card, as do workers with less job seniority, lower incomes and unskilled jobs. They also quoted statistics from the FDIC that showed that the total dollar amount of credit card loans and loans that are 90-days delinquent each tripled between 1992 and 2006.

In addition, the analysis indicates that payday loans have become an increasingly common form of short-term debt, especially among lower-income households. While payday loans are designed to lend small amounts of money for a short time (usually, about two weeks), one report indicates 90 percent of lenders' revenue comes from borrowers who have five or more loans per year, not one-time borrowers.

The key question posed by Engemann and Owyang is: Does this new behavior have detrimental long-term effects? They cited one economic study that said between 1980 and 2005, the amount of revolving debt per household—especially credit card debt—coincided with an increase in personal bankruptcy filings. Another study found that payday loan applicants in Texas were six times more likely to file for bankruptcy between January 2001 and June 2005 than the general population of the Lone Star State.

"This shift toward more debt appears to have long-term ramifications for the U.S. economy," wrote Engemann and Owyang, "as evidenced by the growing number of personal bankruptcies over recent decades."

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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