Debt is something of a strange topic for Americans.
For all but the most well-capitalized early in life, the ability to borrow funds is critical — at least if one wants to get a college degree, own a car or a buy house.
When used wisely, tools that provide consumers access to funds today to pay for things “over time” plays an important role in a consumer’s financial reality — not to mention fund more than their fair share of startups. The world would be Google-less without Sergey and Larry maxxing out their credit cards to buy more space on servers.
And using credit wisely, it seems, is on the uptick. Evidence of that is in a new Creditcards.com study that suggests that consumers are slowly gaining confidence about becoming debt free during their lifetimes. Among consumers who have debt, about 12 percent believe they will never pay off what they owe. That is a big drop from the 2015 report that indicated that 21 percent of consumers thought they were going to leave their descendants nothing but debt.
More good news. In this year’s report, 24 percent of respondents said they had no debt at all, up from 22 percent last year and 14 percent in 2014.
“Over the last three or four years, the economy has improved, job growth has been strong and wealth has been rising,” said James Chessen, chief economist at the American Bankers Association. “I think people are feeling wealthier and feel they have the capacity to repay debts.”
So, time to give out the party hats?
Well, maybe — as we love nothing more than a positive interpretation of data as much as the next group of financial services junkies here at PYMNTS — and once, just once, we would actually like to give out the party hats.
But sadly, the hats are staying on the shelf — again — this week. Because the data might indicate that things are on the upswing — and we sure hope they are.
But … there is a less positive way to look at that data. It could be that people — particularly millennials — are confident they are going to die debt-free because they are equally confident they are about to live their entire adult lives without ever once being credit-worthy.
On The Bright Side
The economy is showing strength, and despite the fact that consumer debt is quickly approaching pre-recession levels delinquency rates for closed-end loans and credit cards have remained at 15-year lows for the past three years.
“It suggests that people felt they were carrying too much debt,” Chessen noted. “The possibility of a job loss or other financial disruption was debilitating, and they worked hard to avoid that situation in the future. I think there were some lessons learned from that.”
And consumer confidence around debt is on the upswing, albeit inconsistently. About 60 percent of younger millennials think they can wipe out their debt by age 30. Gen-Xers and baby boomers, on the other hand, are far more likely to believe they are going to die in debt. Part of that is due to their life stage — millennials haven’t done their “big borrows” other than education by age 30; Gen-Xers and baby boomers have mortgages and their kids’ tuition payments.
But, said John Pelletier, director of the Center for Financial Literacy at Champlain College, the experience of coming of age during the Great Recession — a financial crisis born of bad debt — was formative.
“[Millennials] are going to be very different from their Gen-X and boomer peers, in the same way people who went through the Great Depression were different from generations that came before and after them,” Pelletier noted. “They’re not buying homes, and it’s not because they all can’t — they’re choosing to rent longer. Even those who can buy homes want mobility. They’re afraid of losing their job and don’t want an illiquid asset that prevents them from leaving. They want the flexibility to pick up and move to where there is job growth.”
It is an upbeat assessment. Consumers really learned their lesson from the financial crisis, modified their behavior and resolved to get their overspending under control.
The Less Upbeat Way Of Looking At It
One problem with Pelletier’s assessment is that it is somewhat belied by other data. Though it is often asserted that millennials are the generation of Americans that don’t want to buy homes, they have this annoying habit of affirming they really, really do want to buy homes — they just can’t afford to.
As it turns out, a generation of Americans has not chosen to live with their parents for love of their mother’s cooking — but because of a depressed economy that spat them into a depressed wage market, combined with some very much more stringent underwriting requirement in the post-crisis world means that many millennials think their only and best shot at home ownership is saving up for a down payment while sleeping in their childhood bedroom.
There is also the data that indicates Generation Sriracha is not bringing in the money the way their forebearers did.
As Karen Webster (who we stole the term Sriracha generation from) noted in her recent piece on the coming millennial FinTech crisis, the data is in — and should be scary for anyone trying to capture the elusive millennial spend.
As it turns out, that spend might be elusive because millennials are Generation Financial Responsibility more or less because they are Generation Broke.
“The news flash here is that the prospect of kids entering their third decade of life and out earning their parents has been on a slippery slope since the 1950s…. But that downward slide took a nosedive for the kids born in the 1980s — or what we call today the millennial generation,” said Webster in her piece. “Overall, only half of them will ever best the earnings potential of their parents and even, quite possibly, their elder siblings. Depending on those millennials’ lot in life, even 50 percent may look optimistic.”
And then there is one more fly in the ointment — 47 percent of Americans who do not have easy access to $400, according to the Federal Reserve Board (i.e., through cash or credit card) in the event of an emergency that calls for it. We suspect that many of those Americans show up in the 25 percent of those who are currently living debt-free. And they will stay in that category right until they have a financial emergency and need to borrow that $400 from a short-term lender with a 300 percent APR.
There is nothing bad to be said about responsibly managing debt — and certainly consumer confidence that they can do so is always a good sign. However, celebrating all reductions in household debt and all intentions never to borrow as good news is probably not such a good idea either. If millennials don’t use debt because they don’t care to, that is one thing. If they can’t, that is quite another.