Americans Saving More and Paying Off Debt Faster Than Expected

money in the hands

Americans are putting money into their savings accounts and paying down their debts faster than analysts expected.

Three years since the Great Recession started, consumer debt, which peaked at $12.5 trillion in 2008, dropped to $11.4 trillion in the fourth quarter of 2010. Despite historically low current mortgage rates, mortgage debt dropped nearly 10% and home equity lines of credit debt fell 6.5%, according to a recent quarterly report from the Federal Reserve of New York.

Why paying down debt is good for the economy

Although American's newfound habit of opening savings accounts instead of shopping has slowed the growth of the economy in recent months, economists say it's generally good news that Americans are getting their finances in order. A study by the Federal Reserve Bank of San Francisco showed that areas where people took on less debt relative to their income in the years leading up the recession endured the recession better than areas with higher debt amounts.

One big reason for the recession was that consumers borrowed more than they could afford to buy overpriced homes. To make matters worse, many homeowners borrowed against the unrealistic amount of equity in those homes.

According to the Washington Post, Americans will start spending again once they've built up their savings, and that will give the U.S. economy a much-needed lift.

Shrinking debt--will it continue?

Although Americans have tripled their savings rate since 2007--putting 5.3% of their disposable income into savings accounts, money market accounts and their checking account--it appears they have also been diligently paying off their consumer debts since the recession ended 18 months ago. Since the summer of 2008, when consumer debt was at its highest point, consumers have 12% less in auto loans and 15% less credit card debt.

And people are closing out credit card accounts at a good clip. According to The Sacramento Bee, 211 million credit card accounts were closed in 2010 while 164 million were opened. Overall, the number of credit card accounts has fallen 23% since the second quarter of 2008.

The Post noted that consumer debt has also shrunk because banks have written off billions in loans and mortgages that went bad, and banks aren't loaning out as much money. They are also screening borrowers more closely than in the years leading up the financial crisis.

How long will Americans remain this way? The Post points out that our debt in relation to our overall economy remains historically high. And the personal savings rate is still below the 7% average of the last 50 years.

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