Consumer Debt Falls as the Holiday Season Approaches

Fewer individuals are incurring new credit balances, and appear to be taking a more proactive approach to managing their accounts.

Overall consumer debt levels fell $256 billion during the third quarter of 2012 compared to where they stood at this point last year, according to a new report from credit bureau Equifax. However, most of the declines revolved around mortgage balances – which dropped 3.4 percent – rather than other credit types, which actually increased 0.7 percent. The decline in mortgage balances may be attributed to higher incidences of refinances, due in large part to record low rates.

Further, the results showed that trends varied in different parts of the country, with total consumer debt falling in all but three of the 25 metropolitan areas compared to last year. Balances increased 1.37 percent in Houston-Galveston-Brazoria, 1.05 percent in Pittsburg and 0.8 percent in Dallas-Fort Worth.

“We continue to see debt declining significantly in certain markets, including those in California, Florida, Nevada and Arizona, where the housing bust was particularly severe,” said Trey Loughran, president of the Personal Solutions unit at Equifax. “The high number of foreclosures means many consumers have reduced their debt involuntarily. Also, consumers who are current on their debt are being more disciplined in taking on new obligations and in how they manage the credit they already have.”

Lowering consumer debt levels in the future

As the end of the year approaches, consumer debt levels may increase due to holiday spending. However, there are ways shoppers can keep their balances manageable and avoid a debt hangover as they enter the new year.

For example, making a holiday-specific budget and adhering to a list of purchases can help people avoid overspending on items. Doing this early may also give individuals time to seek out sales or take advantage of online deals. Paying with cash is another effective way to avoid credit card debt around the holidays. People tend to think more carefully about their purchases when they pay with cash, which can help them make smarter shopping decisions.

It’s also important that consumers make lifestyle changes during the holidays to stretch their income. Eating out, attending pricy events and taking advantage of deals tends to be more tempting during the holiday season, but it can cost consumers a great deal of money. Scaling back these activities can free up more income to help individuals avoid turning to credit.