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Experts say this amount is the ‘breaking point’ of household debt — but what does that mean?

When the economy contracts and the inevitable recession begins, my guess is things won’t be so easy and the burden of unsecured debt will become more apparent.

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A Visa card holder holds up his card next to a credit card reader at Best Buy in Mountain View, Calif., Monday, Feb. 25, 2008.

A Visa card holder holds up his card next to a credit card reader at Best Buy in Mountain View, Calif., Monday, Feb. 25, 2008.

Paul Sakuma, Associated Press

Sometimes, you can learn a lot about today by leafing through the yellowed pages of old newspapers (or the not-so-yellowed pages of newspapers.com’s electronic archives).

In April 1937, economist Roger Babson wrote an opinion piece that warned about the misuse of credit. It may be good to buy something you can’t afford if that that thing is a machine that will pay for itself over time by saving money, he said.

“However, when the article purchased is for immediate consumption, that is a ‘horse of another color.’ If credit is so easy that it is extended to cover consumer goods, then ‘time’ sales are no longer sound merchandising practice. Buying shirts, dresses — and even furniture — on ‘budget plans’ is dangerous, particularly if the percentage of such purchases to the total is too high.”

Do that, he warned, and you will be “simply adding to present buying power at the expense of future income and employment.”

We might smirk at this today, although it’s worth pointing out that the nation fell into what sometimes is called the second Depression later that year, bringing unemployment back to about 19% by June of 1938.

Today we buy shirts, dresses, furniture, lunch, gasoline, groceries, Big Gulps and just about anything else on credit without much worry about the difference between immediate consumption and appreciating assets. 

And yet you might hear some distinct echoes of Babson in what Dave Kranzler of Investment Research Dynamics wrote last year:

“Using debt to consume does not accomplish economic growth. It simply shifts consumption from the future to the present. Unless by some miracle the average household experiences an unforeseen jump in income — enough to enable it pay down debt and continue consuming at the present level, consumer spending will hit a wall.”

I thought about this the other day when I read the latest wallethub.com study on credit card debt and trends. The average American household now has $8,602 in credit card debt, which is up 5% from a year ago. The lowest average debt is $6,884 in Vermont, and the highest is $10,175 in California.

Utah comes in at a not-so-impressive $9,124, although overall consumer debt here is only the 34th highest in the nation.

Sure, some of this represents purchases people immediately paid off the next month, but Americans charged $35.6 billion more during the second quarter of this year than they paid off in the second quarter of last year. 

Wallethub projects the “breaking point” for Americans would be another $1,519 in average household credit card debt away. But I’m not sure what that means. Nor am I sure how that was calculated. 

When people talk about debt (and these days, not many people are talking about it), they tend to focus on the national debt, which now stands at about $22.5 trillion. But personal debt, which includes credit cards, mortgages, car loans and other obligations, is quickly approaching $20 trillion. According to debtclock.org, the nation’s total debt, which includes government, business and personal obligations, is at $74.2 trillion.

The gross domestic product, or the sum of all goods and services made in the U.S. during a year, is only $21.4 trillion.

You can find experts who say this is no problem. The economy is secure. Households generally are able to make payments and default rates are low. 

My guess is things won’t be so easy and the burden of unsecured debt will become more apparent.

It’s easy to get lost in the numbers, just as it’s hard to fathom billions, let alone trillions, of dollars. By any measure, Americans are far wealthier today than they were 82 years ago when Roger Babson was publishing his warnings. We seem to be doing just fine by waving credit cards like magic wands and gladly paying Tuesday for a hamburger today.

It can be hard, in a world like this, to give much credence to the wisdom of those who spoke many generations ago, especially when they referred to the spending we do each day, and the retail and manufacturing jobs that spending supports, as a “horse of a different color.” We tend to feel pretty comfortable in the saddle of consumer spending.

But when the tide turns, when the economy contracts and the inevitable recession begins, my guess is things won’t be so easy and the burden of unsecured debt will become more apparent.

Complaining about Washington overspending can have an impact, especially if enough people vent to their local representatives. But household overspending is something only we can control.