More Americans feel confident about taking on debt in 2020, even as delinquencies rise

Consumers are feeling better about taking on more debt.

Americans are more confident about their ability to take out credit than they were a year ago, according to the latest Survey of Consumer Expectations from the New York Federal Reserve. The percentage of people who found it easier to access credit this year compared to last increased by 6%. Perceived access to credit is important for banks because it could mean that fewer people apply for loans and credit cards, thinking they will be denied. Consumer confidence also hit its biggest peak in five months, data released by the Conference Board last month concluded.

People are also taking out more loans. In fact, more than 20 million Americans have taken out personal loans over the last year, which is double the number of people in 2012, according to studies by the major credit bureaus. The average loan balance is $16,259, Experian EXPGY, +1.58% said in one 2019 study. Consumer debt has reached record levels, currently nearing $14 trillion in the third quarter of 2019, up $1.3 trillion on the previous quarter, according to the New York Fed.

Credit-card borrowing rose by $12.6 billion in December, the Federal Reserve said earlier this month, marking largest monthly gain in two decades, exceeding the $19.5 billion increase in April 1998. Total consumer borrowing in December rose by $22.1 billion, more than twice the amount raised in the previous month. Credit-card delinquencies, however, continue to fall, separate data from the American Bankers Association’s Consumer Credit Delinquency Bulletin found.

A question mark over China’s economic growth

However, taking out too much debt can leave people strapped for cash, especially if the U.S. is hit by a recession in the coming year. Some argue that the U.S. economy still isn’t firing on all cylinders, citing a reduction in business spending. The recent outbreak of the coronavirus in Central China and its subsequent spread also leaves a question mark over how China’s efforts to deal with the epidemic will impact its own economy and, in turn, affect global economic growth.

A recent Gallup poll found that 49% of poll participants said a recession will likely arrive in the next 12 months. In October 2007 — two months before the Great Recession began — 40% of poll participants felt the same way. Republicans are rosy and Democrats are downbeat: 21% of Republicans said a recession will likely happen within a year, while 74% of Democrats said a recession is coming in that time. Independents were evenly split.

“Personal loans were often considered a last resort for people trying to escape debt. But since financial technology firms, or fintechs, began flooding the market in recent years with unsecured personal loan offers, personal loan balances have surged,” Experian’s report added. “Fintech loans can be easier to qualify for than those from traditional banks and credit unions, and consumers looking to make big purchases or consolidate debt are turning to them in record numbers.

One factor that could be driving that confidence: Americans’ record high credit scores. Average credit scores of Americans are at an all-time high of 703. The low-interest-rate environment may be another reason why consumers’ perceived access to credit improved this year. As borrowing money has become cheaper, consumers may have noticed that banks seem more willing to extend credit to borrowers as they seek to maintain their bottom lines.

Interest rates remain attractively low

In 2019, the Federal Reserve lowered its benchmark interest rate three times — each time by 25 basis points. When the Fed lowers rates, banks often follow and lower the interest rates on their credit cards, too, making it less expensive for consumers to pay off debts they have incurred. By contrast in 2018, the Fed raised interest rates four times — also by 25 basis points. In the Fed’s most recent decision, Chairman Jerome Powell left rates unchanged citing muted concerns about the U.S. economic outlook.

On the upside, banks have tightened their credit standards in recent years, which makes it harder for more people to get a new credit card. Even as demand for credit increases “doesn’t mean that the banks are always willing to play along,” said Matt Schulz, chief industry analyst at CompareCards.com. He added, “Banks are still very happily lending — just not quite as eagerly as they did three or four years ago.”

Still, Americans’ financial satisfaction recently hit a 10-year high, according to the American Institute of CPAs (AICPA), a member organization of certified public accountants. AICPA calculates the index by measuring financial “pleasure” — including job openings, stock market performance and real home equity — against “pain” from loan delinquencies, underemployment, inflation and personal taxes. Taxes were the only measure of financial pain that increased over the last decade.