The rise in consumer debt levels had affected the future spending by households and slowed the US economy. Many analysts have expressed this concern due to record number of bankruptcies that are filed, increased negligence rate on consumer loans, and an increased amount of income going towards paying interest on debt are the signals that households have become overextended.
Previously US consumers were taken record levels of debt as low interest rates have lured them to buy bigger houses, cars and use credit cards on every purchase. While lower interest rate and increased earning capacity made this higher debt levels manageable, but, now with increase in interest rates and decrease in earning capacity due to higher unemployment rates and financial crisis across the globe made the consumers exhausted.
Many economists had warned consumers that rise in interest rate will make the consumers over their heads when the payments increase. The other reason for this record level debt is Federal reserve which said interest rate are not going to rise until the economic growth and at the same time the rise in income earning potential making the payments possible.
According to federal reserves data, the credit card debt level increases as the unemployed were forced to live on credit cards. The rise in card balances made the consumers to slowdown the spending because use of cards for their purchases will cost more cost of carrying if they were unable to pay off the debt in time.
If the employees were encouraged to save the money to clear of the credit card balances then it will hamper the economy growth because the two third of the US economic activity is through consumer spending which would ultimately hamper the economys ability to grow and create job for the people.
The overall debt that the consumers are carrying is around $3000 trillion of which much of the debt is in the form of credit card debt. The rise in the credit card debt is because increase in unemployment rate, which is at its peak levels. We see faster pace of loosing jobs as a result the faster the increase in credit card debt levels.
The reason behind this is unemployment and underemployment. Due to decreased amount of earning capacity and unemployment, people are forced to live on plastic. American consumer had taken benefit of every means to avail money for living like credit card debt, cash out refinancing, home equity loans and auto loans for living conveniently. It has been very easy and funny to live lavishly which was out of their range but ultimately it has come to an end with reduced earning capacity or unemployment.
Fortunately, the federal government had come up with number of relief packages like cut in taxes and given rebates to all Americans, Federal Reserve cut interest rates to 1% and introduced a insurance called FHA secure for people who is maintaining good credit and unable to refinance their mortgage only because of decline in home prices to pay off their debts.
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