The Federal Reserve Bank of New York released a study revealing that total household debt in the US has risen above recessionary highs. Driven primarily by growth in nonhousing-related debt, total household debt in the US climbed to $12.8 trillion in Q2 2017, surpassing the $12.7 trillion reached in Q3 2008.
Student and auto loans are behind much of the rising debt since the financial crisis.
- Student loan debt has more than doubled. Total student loan debt rose from $611 billion in Q3 2008 to $1.34 trillion in Q2 2017, and now accounts for 36% of nonhousing debt, versus 23% in the prior period. And students are increasingly struggling to pay off their massive debt burdens — student loan default rates rose 14% from 2016 to 2017, according to The Washington Post.
- Auto loans have also shot up. Household auto loan debt rose 47% from Q3 2008 to Q2 2017, from $809 billion to $1.19 trillion. As mortgage regulations tightened in the wake of the recession, lenders with risk appetite have turned attention to auto loans and extended credit to customers with lower credit scores. In February, Quartz reported that auto loan delinquencies ticked up.
- Credit cards and mortgage debt has dipped slightly. Mortgages are finally starting to recover from their 2013 trough, but are nonetheless down 9% from Q3 2008 to Q2 2017, from $9.99 trillion to $9.14 trillion. Credit card debt similarly dropped from $858 billion in Q3 2008 to $784 billion in Q2 2017.
Rising debt and defaults give lenders cause for concern — but there are silver linings. As lenders extend to riskier customers, the specter of defaults is growing. However, risk appetite isn’t the only thing rising with the economic recovery — FICO data cited by Bloomberg showed credit scores are also trending up, driven by favorable economic conditions and better tools to access credit scores. Looking ahead, if lenders’ risk appetite continues to build, the use of emerging toolsfor credit modeling, such as social media or artificial intelligence, will become increasingly important to limit defaults.