Consumers Get a Handle on Debt... for Now

Individuals are doing better than the federal government in terms of getting a handle on debt, at least for now. TransUnion, one of the big three credit reporting agencies, just released a study showing Americans have made dramatic progress in paying down credit card debt, despite the obviously poor state of the economy.

And the household debt service ratio (DSR), which estimates the proportion of debt payments to after-tax income, is at its lowest level since the middle of 1995. The ratio takes into account required principal and interest on outstanding mortgage and consumer loans.

The financial obligations ratio (FOR), an even more realistic measure of household debt, adds such things as automobile leases, rent, property insurance, and real estate tax payments to the debt service ratio. The FOR is down, too, for both renters and homeowners.

But here's the thing: Those positive statistics measure consumer behavior only through the first quarter of 2011. Statistics trickling in for the second quarter, including the most recent data from the Federal Reserve, show consumer credit is increasing.

Take the positive spin on household debt with a grain of salt, and understand debt will rebound unless there is another collective belt tightening -- an arguably difficult task, given the current unemployment rate.

In the study released today, TransUnion found consumers spent roughly $72 billion more on credit card payments than on card purchases between the first quarters of 2009 and 2010. The research refutes perceptions that the primary reason card balances have declined in the past few years is because creditors were writing off debt they deemed uncollectable, the agency stated.

(TransUnion, owned by the private equity firm Madison Dearborn Partners and Chicago's Pritzker family, apparently has quite a bit of debt of its own. In a filing with the Securities and Exchange Commission this month, the Chicago company said it plans sell up to $325 million in stock in an initial public offering and will use the proceeds to reduce "a substantial amount of indebtedness" and for general corporate purposes.)

Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit, said, "Our analysis shows that consumers have made a concerted effort to pay down their credit cards during these uncertain economic times."

Between the first quarter of 2009 and the first quarter of 2010, average credit card debt per borrower in the US declined more than $600, from $5,776 to $5,165, the study found. By the first quarter of 2011, the average debt had hit a 10-year low of $4,679.

The unanswered question: What will that average look like as the year goes on?