Consumer Spending

American consumers have now completed three straight months of more consumer debt!

Recent statistics have indicated that the American consumer has now gone three straight months increasing consumer debt. This is worrisome for a couple of reasons.

  1. Debt ratios. All loans require a specific debt ratio which is the monthly payments divided into the income. When people borrow more money, as they have three months in a row, then the payments to service that debt increase. This increase in payments causes the debt ratio to increase. For many mortgages, the acceptable ratios are 28/40. This means 28% of a person's income can be applied to the mortgage debt. The 40% means by adding the mortgage debt and all other consumer debt (auto, personal, credit cards) cannot exceed the 40% ratio. The three month increase in consumer debt puts these debt ratios at risk. Don't meet the ratios....don't get the loan!

  2. Balance ratios. The balance ratios are a whole other animal and apply only to the credit score. 30% of the credit score (255.0 points) are awarded based on the amount of revolving debt divided into the revolving available credit. If the three month increase in consumer debt is due to increased credit card usage, then undoubtedly the balance ratio has increase. This increase in balance ratio will lower a credit score.

For example: I had a client with a 27% ratio on a credit card which means that they owed 27% of the available credit. The next month they made a large purchase that raised that ratio from 27% to 41%. The result was that their credit score dropped by 17 points. This drop was not the result of new credit, or slow pay, or any other negative pay history factor...the score was dropped by 17 points simply because the borrower increased their credit card usage to 41%.

For the best credit scores, always keep the balance on your credit cards at less than 30% of the available credit.

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