MARCH 2004

Revised Data on Consumers’
Debt Service Payments

The October issue of the Federal Reserve Bulletin carries an important article, "Recent Changes in a Measure of U.S. Household Debt Service." As the title suggests, the article describes the impact of important revisions to the Fed’s very useful statistical series that tracks household debt payment burden. Perhaps the most important change in the series is the explicit recognition of rental payments as a recurring financial obligation, even though rental payments are technically not debt service payments.

At the outset, authors Karen Dynan, Kathleen Johnson, and Karen Pence of the Federal Reserve Board’s Division of Research and Statistics clearly state the significance of the data to those providing consumer credit.

"When a large share of household income is devoted to debt repayment, households have fewer funds available to purchase goods and services. Households with high debt levels relative to income are also more likely to default on their obligations when they suffer unanticipated misfortune such as job loss or illness."

The revisions are extensive, carefully explained and justified. We provide a brief summary of the key findings of the research and a table showing the revised data for the past eight years. Readers wishing to review the entire article should visit the Federal Reserve Bulletin articles page of the Federal Reserve Board Web site.

Major contributions

There are a number of issues to consider when measuring "debt levels relative to income." In essence, the changes focus on relating consumers’ required cash payments on their debts, whatever their legal form, to their after-tax income. Thus, payments on an automobile lease affect household cash outlays in the same way as payments on an automobile loan. Similarly, the revisions explicitly recognize for the first time that rental payments reflect an ongoing financial commitment just as surely as home mortgage payments. In short, a consumer who drives a leased car home to his rented apartment has financial obligations very similar in terms of the required monthly cash outflows to those of a consumer who has an auto loan and a home mortgage loan. However, in the past these transactions were not treated alike in calculating measures of consumers’ debt burden.

To address this issue, the Federal Reserve Board has approved three new measures of household debt service obligations in relation to household after-tax income.

• A revised debt service ratio (DSR) provides an expanded measure of consumer "credit" and a revised estimate of loan maturities and interest rates. These revisions added 3.78 percentage points to the estimated household debt service ratio. The major revision accounting for this change was the inclusion of rental payments.
• Two household financial obligation ratios (FOR) have been created: one for homeowners and the other for renters. Rent, auto lease payments and other recurring financial obligations have been included when calculating the household debt service ratio. This new ratio has grown faster than the other two measures of household debt service.

The table below summarizes the important findings of the revised data on household debt service and financial obligations ratios as percentages of disposable personal income. All of these ratios have increased slightly from 1996 to 2003, but certainly not enough to cause alarm from a macroeconomic perspective. Still, it is especially interesting to note the sharp contrast between the Financial Obligation Ratios of homeowners and renters, with the later group having FORs about twice the level reported for homeowners. In addition, the FOR for renters increased more rapidly than for homeowners, rising from 25.3% in 1996 to 28.8% in 2003.

Source: Federal Reserve Board.