According to a study conducted by Card Hub, U.S. household debt in the form of credit cards has spiked higher in 2015!
Is this spike in leverage a sign of consumer confidence with households taking on debt due to an optimistic vision of their personal financial fortunes going forward?
Or is the 2015 2nd quarter credit card balance increase of $32.1 billion, after a $35 billion balance pay-down in the 1st quarter, more of a troubling sign that personal finances are being stretched thin and that debt is the only way for Americans to make ends meet?
With Card Hub projecting a year-end net increase in credit card balances of $60 billion, it’s that company’s opinion that this amount would put the consumer close to the point where the debt load becomes unsustainable.
Credit Card Debt And Real Estate
So given the fact that debt is on the rise, will that have an adverse impact on those either trying to buy a home with bank financing or who are attempting to refinance an existing mortgage.
Given the numbers mentioned above, borrowers need to be extremely aware of that often mentioned household financial metric, DTI (debt to income ratio)!
Once this debt to income ration moves too high, borrowers will basically be disqualifying themselves based on that number alone.
‘Lenders not only use your credit score as an indicator of your overall creditworthiness, but they also use your debt to determine your approval as well. Every lender uses a debt-to-income ratio as part of the loan approval process. This ratio compares your new monthly mortgage payment to your gross or pre-tax monthly income, to get a percentage called the “front end ratio.” Lenders also take your set monthly debts, including all installment loan payments, credit card minimums, additional rent or mortgage payments, and obligations such as child support, and add them to the new mortgage payment. They then compare that amount to your monthly income to get what they call the “back end ratio.” These numbers must fall within certain parameters, which vary according to the loan program.‘ (Source)
For the residential real estate buyers, home sellers, banks, mortgage brokers and all of the other specialists involved in a real estate transaction (i.e. attorney’s, title companies, closing agents, etc.), rising debt without a commensurate rise in income may spell a problem moving forward!
Card Hub Study Findings
By the Numbers:
- Change in Outstanding Credit Card Debt: $25,586,927,800
- Credit Card Charge-Offs: $6,489,489,706
- Net Result in Debt Load: $32,076,417,506
- Relative to Q1 2014: 14%
- Relative to Q1 2013: 86%
- Relative to Q1 2012: 81%
- Relative to Q1 2011: 66%
- Relative to Q1 2010: 234%
- Relative to Q1 2009: 239%
- With 7 of the past 10 quarters reflecting year-over-year regression in consumer performance, evidence is mounting to support the notion that credit card users are reverting to pre-downturn bad habits.
- We expect outstanding credit card debt to cross $900 billion by the end of the year, bringing the average indebted household’s balance to $7,813 — the highest amount since the Great Recession and $615 below the tipping point CardHub identified as being unsustainable.
- While credit card debt levels are trending significantly upward, charge-off rates remain near historical lows and are, in fact, down on a year-over-year basis. Something clearly has to give, and it does not seem to be our spending habits.
- Consumers tend to incur less credit card debt in the third quarter of the year than in the second, before spending spikes during Q4. Just how bad this year will be for our wallets may thus depend on how flush we’re feeling during the busy holiday shopping season.
Article by Michael Haltman, President of Hallmark Abstract Service in New York.
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