As part of its triennial Survey of Consumer Finances, The Federal Reserve has studied over 6,000 consumers on three separate occasions in the past decade: in 2007, 2010 and again in 2013. This research paints a interesting portrait of the financial and psychological forces affecting today’s banking consumers.
1. How Consumers Shop for Financial Services Has Changed
As a normal part of their financial lives, families make a variety of decisions to select investment products for any savings they may have, or loan products for any credit they may use. To the extent that families devote more or less attention to such decisions, or are better or worse informed, the wealth of otherwise comparable families may differ substantially over time.
The Federal Reserve’s study includes a self-assessment of families’ intensity of shopping for borrowing or investing services. Note that although the survey questions are intended to elicit a description of behavior in general, the responses could also reflect short-term needs for such services and therefore the immediate need for shopping.
In 2013, only 29% of families reported shopping “a great deal” for loan terms, and 24% “a great deal” for investment terms (figure A). However, the rate of shopping “a great deal” for both loan and investment terms has increased in each wave of the SCF from 2007 to 2013. The percent of families who reported shopping either “a moderate amount” or “almost none” declined from 2010 to 2013.
| Borrowing | Investing | |||||
|---|---|---|---|---|---|---|
| Information used for decisions about borrowing and investing |
2007 | 2010 | 2013 | 2007 | 2010 | 2013 |
| Calling around | 33.4% | 27.0% | 24.7% | 18.0% | 15.7% | 13.2% |
| Advertising/media | 43.0% | 34.2% | 29.0% | 29.9% | 26.1% | 21.3% |
| Internet | 38.4% | 41.7% | 47.0% | 28.3% | 33.0% | 35.3% |
| Friends, relatives | 45.9% | 43.9% | 46.0% | 42.3% | 40.8% | 40.8% |
| Bankers, brokers | 39.2% | 39.5% | 41.5% | 38.3% | 39.1% | 38.3% |
| Lawyers, accountants | 19.5% | 19.5% | 21.5% | 29.3% | 31.1% | 31.8% |
| Do not borrow/invest | 9.6% | 14.6% | 13.7% | 10.2% | 11.7% | 13.2% |
In 2013, for the first time, more families turned to the internet than any other source for information about borrowing. The fraction of families who reported using the internet for information about borrowing reached 47% in 2013, well over the 41.7% who reported doing so in 2010. The share reporting that they used the internet as a source of information for investing also rose between 2010 and 2013, from 33.0% to 35.3%.
2. Consumers Have Lightened Their Debt Loads
Between 2010 and 2013, interest rates fell on most types of consumer debt: Typical fixed-rate 30-year mortgage interest rates fell from 5.3% to 3.5%, new vehicle loan interest rates fell from 6.5% to 4.7%, and credit card interest rates fell from 14.3 % to 11.9%. And yet at the same time, debt holdings of families decreased. Overall, debt obligations fell between 2010 and 2013. Median debt declined 20%, and mean debt decreased 13%.
Debt burdens also fell between 2010 and 2013: Leverage ratios, debt-to-income ratios, and payment-to-income ratios all fell. The fraction of families with payment-to-income ratios greater than 40% declined below the level seen in 2001.
Much of the decline in debt can be explained by a large decline in the number of families with home-secured debt, which fell from 47.0% to 42.9%.
Between 2010 and 2013, the fraction of families with credit card debt also decreased. Median and mean balances for families with credit card debt fell 18% and 25%, respectively, while the percentage of families paying off credit cards every month increased.
The fraction of families considered credit constrained — those who reported being denied credit, as well as those who did not apply for credit for fear of being denied—declined slightly from 28.3 percent in 2010 to 27.6 percent in 2013.
Although many measures of debt and debt obligations indicate that debt has fallen, education debt increased substantially between 2010 and 2013.
3. Consumers Still Wrestle With Credit, and Fear Rejection
Researchers asked two questions to gauge whether or not families were credit constrained: first, if the family was turned down for credit, and, second, if the family did not apply for credit for fear of being turned down. Between 2010 and 2013, the number of families responding “yes” to one or both of these questions fell from 28.3% in 2010 to 27.6% in 2013. More families reported not applying for fear of being turned down in 2013 (19%) than in 2010, and fewer families reported being turned down for credit in 2013 (16.4%) than in 2010.The conclusion? Fewer families are feeling “credit constrained.”
The study also asked respondents if they have taken out a payday loan in the past year. Usage of payday loans is often a signal that an individual cannot obtain credit by other means. In 2013, 4.2% of families reported taking out a payday loan, up from 3.9% in 2010 and 2.4% in 2004.
Another indicator of debt-related distress is bankruptcy. In 2013, 4.1% of families reported having declared bankruptcy in the past five years, up from 3.6% in 2010 but down from 4.3 percent in 2001.
Researchers also looked at people’s debt payment behaviors, which revealed a couple bright spots. Respondents were asked whether they were behind on any of their loan payments in the preceding year. In 2013, 14.9% of families reported being late on payments, down from 17.3% in 2010. The percentage of families who reported being late on payments 60 or more days declined from 8.1% in 2010 to 6.9%. Compared with 2001, more families reported being late on payments at all in 2013, and more reported being late 60 or more days.
An additional measure of debt payment behavior is whether a family uses credit cards for convenience only, or carries a balance month to month. In 2013, 64% of families reported using credit cards for convenience only (not carrying a balance), up from 57.9% in 2001 and 63% in 2010 — a steady and significant increase.
4. Consumers Have Fewer Cars, But More Auto Loans
The number of families owning a vehicle fell slightly between 2010 and 2013, down to 86.3%. At the same time, the fraction of families with vehicle loans increased slightly, with 30.9% of families holding vehicle loans in 2013. Between 2010 and 2013, the value of auto loans rose 11%. This means that although fewer families have vehicles overall, they are starting to take out more auto loans that are of greater value.
5. Consumers Continue to Suffer Fallout From the Mortgage Meltdown
The subprime debacle may have happened seven years ago now, but consumers are still dealing with the fallout. The percentage of families that owned their primary residence fell from 68.6% in 2007 to 65.2% in 2013. The last time homeownership rates were this low was 1995. For families in the bottom half of the income distribution, the homeownership rate was 49.2% in 2013; for those in the top 10% by income, the homeownership rate was 93.5% in 2013.
For families that own their primary residence, the value of their houses (defined as the home’s value less any debts on the home) declined between 2007 and 2013. In 2007, the average value of a homeowner’s property minus outstanding mortgages was $221,000. In 2013, that number had fallen to $159,400.
Paralleling the drop in homeownership, rates of holding of debt secured by a primary residence (home-secured debt) fell between 2010 and 2013. The fraction of families with mortgages and other home-secured debt fell from 47.0% in 2010 to 42.9% in 2013.
6. Socking Money Away is Always a Struggle
Between 2010 and 2013, the overall proportion of all families that saved remained basically constant, rising only slightly from 52% to 53%. The fraction of families who reported saving in 2013 is still lower than it was in the 2007 survey, when the fraction of families that saved was 56.4%.
Lower income families struggle the most. Between 2010 and 2013, the fraction of families that saved fell for those in the bottom third for income, but rose for everyone else. In 2013, the fraction of families in the top income group that saved was 82.4%, more than double the 40.2% that saved in the lowest income group.
7. Consumers Suffocate Under Burdens of Education Debt
The level of education loan debt held by U.S. families has increased dramatically over the past decade. The fraction of young families with education debt increased from 22.4% to 38.8 percent between 2001 and 2013.
Young families with education debt and a bachelor’s degree or higher use about 3.8% of their income to repay education debt. One reason debt payments are low is that families can defer education loans. If everyone who’s postponed their obligation had to start repaying on their deferred loans, they would use another 2.7% of income to repay education debt.
Young families without a college degree use 2.3% of income to repay education debt. However, if those families had to start repaying their deferred loans, then they would use an additional 3.5% of their income for repayment.
The use of deferments may help families manage their education debt in tough economic times. But education loans are not generally dischargeable in bankruptcy, so these debts will eventually have to be repaid.
Bottom line? Education loans are a big, emotional and financial yoke dragging consumers backwards both financially and psychologically, and for many years.