Consumers are paying down their debt instead of stocking up on clothes and housewares. And it doesn’t bode well for the economy
By Brianna McGurran
Caitlin Hannon makes a good salary as the executive director of a non-profit in Indianapolis, an area with low living expenses. She even bought a foreclosed three-bedroom house in a historic neighborhood two years ago.
But she isn’t exactly a big spender.
“I’m living like a pauper,” said Hannon. “I’m training myself not to make any impulse or fun purchases.”
Hannon, 30, built up $15,000 in credit card debt by the time she graduated from college in 2010. And now she’s curbed her spending severely so she can finally pay down her balance.
“I paid to live a lifestyle that was far beyond my means just because I could,” she said.
She’s not the only one who’s paying off her debt rather than going shopping. Retail sales disappointed in the last quarter of 2013 and in the first two months of this year. On top of that, total household debt increased just 2.1 percent in the fourth quarter to $11.5 trillion, according to an analysis by the Federal Reserve Bank of New York. That’s 9.1 percent below its high of $12.7 trillion in the third quarter of 2008. Economists are worried that if consumers keep restricting their spending, the recovery could slow even further – or stall altogether.
“The longer it lasts, there’s some chance you’re going to get long-term damage for the economy,” said Scott Brown, chief economist at Raymond James.
Randy Lesko, 26, said he got back $2,700 on his income tax return last month. Instead of going on a trip or buying fancy dinners, he paid it all toward his $7,500 credit card balance. With $100,000 in student loans and a $430 monthly car payment, he said he can’t bring himself to buy things spontaneously. And when he does, he regrets it.
“I feel guilty that I pay $25 for a shirt,” said Lesko, who works in student affairs at California State University, Northridge. “And that would be the only purchase that I make for a month, maybe two months.”
Kat Schroeder is a Type 1 diabetic and has a high deductible on the health insurance she gets from her job at a software company in Washington. She said she’s had to put a lot of medical expenditures on credit cards in the past few years, leaving her $13,000 in debt.
Her monthly credit card payments don’t leave her a lot of room to buy clothes or electronics.
“If I can get them it’s usually because I’ve found some way to get outside of my budget with it,” said Schroeder. She bought a TV for $500, the last big purchase she made, with gift cards that she had saved up.
Periods of frugality might all be part of the lifetime debt cycle for some consumers, said Kevin Harris, chief economist at Informa Global Markets.
“They planned to spend less now because they assumed debt in a prior period knowing that they would have to pay it back,” he said.
The more worrisome trend is that incomes aren’t rising, he said, which keeps consumers from wanting to take on new debt.
But stagnant incomes have only affected consumers’ willingness to build up certain types of debt. Credit card debt, or revolving credit, grew just 1.9 percent in the fourth quarter of 2013, while nonrevolving credit, which includes student and car loans, grew 6.8 percent.
Student loan debt was the only type of household debt that rose throughout the recession, and now it accounts for the second-largest share of debt behind mortgages. The average balance per borrower also increased 70 percent between 2004 and 2012.
Lesko, the college employee, said most students take on debt without realizing how the repayment process will affect their spending power in the long run.
“For a lot of people these loans exist as imaginary numbers,” he said.
In 2009 Robert Applebaum, a Fordham University law school graduate, founded the advocacy group Student Debt Crisis, which champions student loan forgiveness as a way to stimulate the economy.
Applebaum pays $500 a month toward his student loans, and he said he relies on Christmas and birthday presents to get what he needs.
“I’m not buying clothes, I’m not buying cars, I’m not buying a house,” he said.
In a recent consumer survey the National Association of Realtors found that 56 percent of first-time home buyers under 33 identified student loan debt as the biggest hurdle to saving for a down payment.
Eliminating student debt burdens would inject the economy with the demand it’s been missing, said Applebaum, by giving him and others more disposable income.
Lesko said he has another idea for how to start over and be able to spend freely again.
“When I dream of winning the lottery I dream of winning just enough to cover my debts,” he said.