The United States of Debt: 5 surprising facts about the state of consumer credit in America
When I decided to investigate consumer lending, I had a rough idea that financial insecurity was a serious problem in this country. But I had no idea of the magnitude of America’s debt crisis. Even after years of economic recovery and a tightening labor market, millions of Americans are still hurting and remain woefully unprepared for the next downturn. Perhaps more importantly, they don’t have the resources to even withstand a little financial bad luck.
Below I have shared five facts that help paint a picture of consumer credit in this country. I’ll conclude with a short discussion of some ways we can begin to chip away at this problem.
1. One in three Americans has debt in collections
If you’re in a public space, look around. According to one recent study by the Urban Institute, every third person you count is struggling with debt. This isn’t a historical problem, a problem people struggled with that’s since been solved. Rather, these people currently have outstanding debt in collections, meaning they have defaulted on debt generated by credit cards or unpaid auto, student, or personal loans.
This count excludes nuisance debt of less than $100. The average amount of debt in collections is $5,100. The median is $1,600.
Some critics might argue that these numbers could represent legacy debt accrued many years before hand — however, the researchers account for this possibility by separating out the debt that has increased by more than $25 in any month in the two years prior to the study. Doing so still leaves 23 percent of Americans with debt in collections, at an average value of $2,800.
Surveys of U.S. consumers corroborate these estimates: 32 percent of consumers report being contacted by a creditor or collector trying to collect on their debts in the past year, according to the Consumer Financial Protection Bureau (CFPB) — though more than half disputed the debt they supposedly owed.
2. Louisiana is the most indebted state in the nation: 46 percent of residents have debt in collections
Although the debt crisis is a national problem, it is felt more acutely in some regions of the country than in others. Louisiana leads the nation with 46 percent of its residents with debt in collections. Overall, the south is the most indebted region in the country: the average share of each states’ population with debt in collection tops 40 percent. The midwest and northeast lead the nation with “just” 26 percent of their states’ populations with debt in collections. The western states average 29 percent, though this average share is brought down by heavily indebted New Mexico (40 percent) and Nevada (41 percent). Minnesota leads the nation with just 17 percent, or one in six residents, possessing debt in collections.
U.S. minority groups have also disproportionately borne the country’s debt: although 27 percent of whites nationwide have debt in collections, the share rises to 45 percent for nonwhites. Perhaps surprisingly, the median debt load doesn’t vary much by state. The District of Columbia leads the nation with a median debt of $955, followed by Massachusetts at $1,002; the state with the highest median debt is Wyoming, at $2,011.
3. Unpaid medical bills are the most common source of debt in collections
Debt in collections is primarily drawn from unpaid bills — 67.5 percent — rather than unpaid loans. One in five Americans has a past due medical bill in collections, whereas about one quarter of Americans have nonmedical debt — unpaid bills and loans — in collections. The prevalence of medical debt is reflected in its share of all collections’ “tradelines,” or entries of debt owed on consumers’ credit reports. As shown in figure 2, 52 percent of all tradelines are for medical debt. (Note: consumers can have multiple medical debts at one time.)
4. Less than 7 percent of debt in collections is recovered
Even as the number of Americans with debt in collections is staggering, the share of debts that gets paid or settled remains very low. Banking debt (personal loans), and unpaid medical and utility bills have the three highest rates of repayment, but repayment for these categories is still low — 11.8 percent, 7.4 percent, and 6.6 percent, respectively. The average payment rate on all debt in collections is just 6.7 percent.
The low rate of repayment is particularly troubling given the adverse effects on consumer’s credit scores. The CFPB reports that even $100 in uncollected tradelines can reduce a consumer’s credit score by 100 points. Unrecovered debts drive up interest rates and can reduce riskier borrowers’ access to credit.
5. America’s debt crisis is improving — with one exception
That so many carry debt in collections is evidence that people are unprepared when financial misfortune strikes. But there is good news. Since the aftermath of the Great Recession, most types of delinquent debt — that is, debt for which payment has not been received for 90 days or more — have fallen to their pre-recession levels. And as shown in figure 4, credit card debt is actually substantially below its pre-recession level. The share of consumers with an account in collections has declined significantly in the last quarter, and the number of consumers who have declared bankruptcies is now at all-time lows.
The one exception to this trend can be seen in the specter of student debt. In a previous post, I wrote about how student debt is at all-time highs, reaching $1.5 trillion in loans outstanding. The trend in figure 4 is troubling because even as the share of student debt that is delinquent has flat-lined, the total outstanding balance has continued to grow, meaning that the total amount delinquent continues to grow as well.
America’s struggle with financial management is pervasive. Millions of people struggle to save, to create a safety net for unplanned expenses or emergencies. As a result, they are forced to go into debt when a financial shock occurs, and the debt they take on is too large to handle. Even though Americans’ personal finances are improving, many remain unprepared: 24 percent of all adults, or 57 million people, have nothing saved for emergencies.
What can be done to make Americans more financially resilient? The proliferation of health insurance has helped to address the problem: as I have written before, the expansion of private insurance and Medicaid following passage of the Affordable Care Act has been linked to both lower medical and nonmedical debt, as well as debt past due. Continuing to expand access to medical insurance could reduce medical debt further, but it’s not a silver bullet: already, 70 percent of medical debt is accrued by those who possess medical insurance.
An important distinction should be made between those who possess ability to repay and those who do not. Those Americans who default on, e.g., their utility bills, likely have trouble affording the most basic of necessities, and have to make the choice between putting food on the table and paying for power — knowing it could take months for their power to be cut off and that pain to sink in. For people in this situation, creating more employment opportunities presents the most promising solution — whether it’s through lower barriers to entering the labor force, new ways for the underemployed to top up take-home pay through alternative work arrangements, or helping full-time workers climb the career ladder to positions that pay better. However, these changes will largely rely on regulatory changes or new public policy initiatives by government and nonprofit actors.
At PayShield, we have developed a product to help address this problem that can be deployed through the market. We partner with employers to offer workers a line of credit as an employee benefit. When times get tough, workers can activate this benefit for qualified expenses, such as car and home repairs, or medical bills not covered by insurance. Although not a panacea, such a benefit can help people to make ends meet when an emergency occurs, while also helping them to stay on track to meet their personal savings goals. When families experience financial emergencies, how they will pay should be the last thing on their minds.
 Though the debt accrued could be the result of past financial mismanagement.
 Some missed utility payments also get passed along to debt collectors. Notably, almost all mortgage debt is excluded since such debt is securitized and therefore not usually sold to collectors.
 I use U.S. Census defined regions, with one exception: I pull Maryland, Virginia, Delaware, and the District of Columbia from the south and put them in their own “Capital” region, due to their geographic isolation from the rest of the south and the strong presence of the Federal government in their local economies. The average share of the population with debt in collections in each state in this region is 31 percent, between the northeast and the south.
 This drop in credit scores is observed for those with excellent credit (e.g., a score of 780). For those with good credit — a score of 680 — the drop is smaller but still substantial, on the order of 40 points.