January 17 2011|01.40 PM UTC

Samantha Eckles

Lesson from the Recession: Downsize Debt (Then Let Your Wallet See a Little Daylight)

Category: Personal Finance, SR

Lesson from the Recession: Downsize Debt (Then Let Your Wallet See a Little Daylight)

Americans have been trying hard to get their finances in order (give yourself a pat on the back). In November 2010, the Federal Reserve noted that credit card debt fell for a record 27 consecutive months (Forbes). That means that we Americans have shaved off nearly $1 trillion from our consumer debt since 2008 and household delinquencies are down 8.2% from 2009. It seems that the economic turbulence reminded us to stop living beyond our means and get out from underneath the burden of big credit card interest rates.

We’re Paying Down Debts

Outstanding consumer credit continues to go down: it hasn’t been this low since 2006. Over the last couple of years, it was often quoted that the average American carried more than $8000 in credit card debt. However, today most households owe $2000 or less and only about 1 in 20 owe more than $8000. Additionally, a recent study of BillShrink’s users showed that more people are paying down their monthly credit card bill this year than last year (66% people pay off their card balance in full each month vs. last year’s 57%).

We are getting our debt under control and one of the ways we’re doing it is reducing temptation: TransUnion notes that while credit expenditures are still rated as the primary method of spending, the number of new cards being issued is dropping by 6.5% year after year.

Saving is Becoming More Prevalent

Consumer savings rates have topped out at 4.8% early in 2010, according to the US Commerce Department. Consumers have finally begun to realize that “a rainy day” could very well be tomorrow, and they are acting accordingly, for the most part.

Amid The Overall Debt Reduction, We Splurged Over the Holidays

Consumer spending powers about 70% of the economy, so observers have been breathing sighs of relief after seeing consumer spending rise for five straight months through November 2010 and kicking off the strongest holiday shopping season since 2006. By the end of 2010, Americans spent $11.64 billion at brick-and-mortar stores or 4% more than they did in 2009. Online retail saw tremendous growth, increasing 16% from 2009 with $1 billion in sales. Even Detroit went out with a bang. Auto sales went up 11% in 2010, the first increase since 2005 (Forbes).

Where did all this spending money come from when the US has a 10% unemployment rate plus another 10% who are stuck in part-time positions or less than ideal jobs they took to avoid being unemployed? Economists say the remaining 80% of Americans have been doing most of the shopping. These folks perhaps believe they’ve survived the worst of the mass layoffs, and feel more secure about their jobs and making a few purchases (Forbes).

Luxuries Still Exist

Starbucks had its strongest revenue quarter ever, increased its Q2 2010 profit more than eightfold, and doubled its Q4 income to $399 million (CNBC, NYTimes). We haven’t given up our lattes; we’re just buying smaller ones.

What about you? Were you frugal in 2010? Were there any conveniences and luxuries you had trouble giving up?

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