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Consumer’s Appetite for Debt on the Rise

Interest rates are on the rise, but that hasn’t curbed Americans’ appetite for consumer debt. If anything, consumers are borrowing more on credit cards or through auto loans than they have in years, and lenders seeking growth are happy to oblige them.

Recently, a male millennial said he signed up for more than five credit cards over the past year, from issuers including Capital One Financial Corp. and Discover Financial Services, after he received offers in the mail. He also took out a $36,000 loan to buy a new Jeep Grand Cherokee. This individual, who rents, said the offers have been arriving as his credit score has improved. He previously had dozens of collections and other negative marks on his credit reports after failing to pay back bills. With a steady income and months of debt counseling behind him, he relayed that he feels confident in his ability to pay for his debts.

So do plenty of other Americans. In the fourth quarter, consumer debt, excluding mortgages and other home loans, rose 5.5% from a year earlier to $3.82 trillion. That is the highest amount since the Federal Reserve Bank of New York began tracking the data in 1999. Moreover, consumers’ non-housing debts accounted for just over 29% of their overall debt load, also the highest amount on record.

Many observers say they aren’t worried yet. Their concerns about non-housing credit are nascent since delinquencies are rising from historically low levels. Also, household debt including mortgages, the biggest category, barely edged up from the third quarter and remains well off the crisis-era highs as a percent of U.S. economic output.

“In good times, people tend to take on a little more consumer credit because they think ‘Well, my income looks good, my job looks very stable,’ and when the economy turns down, they dial that back,” said Tom Miller, professor of finance at Mississippi State University.

Still, there are signs that consumers’ ability to handle these increased debt levels is getting strained. Student loans, the largest debt category consumers hold after mortgages, continue to have persistently high delinquencies.

Overall, households are paying about 5.8% of their disposable personal income to stay current on their non-mortgage debts, according to third-quarter Federal Reserve data. This figure, which is at the highest level since the end of 2008, bottomed out at 4.9% in 2012.

An improving economy has fueled much of the growth in consumer borrowing. Low unemployment and rising confidence have increased consumers’ appetite for big-ticket purchases and made lenders more willing to dole out larger loan balances while increasing credit-card limits. The boost to loan volume and balances has helped lift bank earnings and overall retail sales.

The shift to non-mortgage debt, including credit cards and personal loans, carries some drawbacks for consumers, including higher interest rates. The boom in consumer debt outside the home, along with high interest rates, is in part the result of lingering effects of the last recession that have kept many consumers from buying homes out of fear of foreclosure or because underwriting requirements remain stricter than other types of loans.

Consumer loans have also become easier to obtain in recent years as lenders compete for loan volume. That has resulted in an abundance of loan solicitations in consumers’ mailboxes and inboxes, even as losses start to rise.

Despite the strong economy, missed payments and losses that lenders are taking after borrowers fail to get back on track with their bills are increasing, raising concerns among some banks and their investors. The average charge-off rate for eight of the largest U.S. credit-card lenders by purchase volume was 3.25% in the fourth quarter, up 0.36 percentage point from a year earlier, marking the seventh straight quarter of year-over-year increases, according to Fitch Ratings.

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