If you have multiple credit cards and loans and feel overwhelmed by debt, you’re not alone. Around 80% of Americans are in debt, and escaping it can be challenging. Moreover, Americans are accumulating debt due to factors like inflation and high credit card interest rates after saving more during the pandemic.
In 2022, consumers accumulated a record-breaking $180 billion in new credit card debt, with nearly half added in the fourth quarter, bringing the average household balance to $9,990.
This is not at all good news, but there is still hope. With the right strategies, you can become debt-free and avoid drowning in this financial crisis.
That said, let’s dive into the problem, and what investors, consumers and the general public should be wary of right now.
Understanding Debt
Debt occurs when an individual or entity owes money to another party. It can be in the form of credit card balances, student loans, mortgages, car loans, medical bills, etc. When borrowing money, interest is charged on the amount. Therefore, borrowers must pay back more than the initial loan.
Debt can be both good and bad depending on its purpose and management. For instance, taking out a mortgage to buy a home or using student loans to further one’s education can be considered as “good debt” because it has the potential to increase one’s net worth due to this rising value of assets over the long run. However, when debt is used to fund unnecessary expenses or lifestyle choices, it can quickly spiral out of control and become bad debt.
Consumer debt is the factor many personal finance experts point to as the reason for economic concern. With a significant percentage of the U.S. economy tied to consumption, a widespread credit event affecting the lower- and middle-class could be devastating.
Debt Statistics in the U.S.
The Federal Reserve Bank of New York’s Center for Microeconomic Data released its Q2 2023 Household Debt and Credit Report, revealing a small $16 billion (0.1%) rise in total household debt to reach $17.06 trillion. This data is derived from the New York Fed’s nationally representative Consumer Credit Panel.
Credit card debts surged in Q2 2023, reaching a record high of $1.03 trillion, a 4.6% quarterly rise from $986 billion in Q1. The number of credit card accounts also grew by 5.48 million to reach 578.35 million. Additionally, the total credit card account limits rose by $9 billion to $4.6 trillion.
Mortgage balances remained steady at $12.01 trillion in June due to decreased mortgage activity and slower home price growth. Mortgage originations rose by $70 billion in Q2 to $393 billion. Other balances, such as retail cards and consumer loans, increased by $15 billion.
Auto loan balances increased by $20 billion, continuing an upward trend since 2011. New auto loan volume reached $179 billion, primarily due to high loan values despite lower loan numbers compared to pre-pandemic levels. Student loan balances decreased by $35 billion to $1.57 trillion. Delinquency rates remained low, with slight increases in transition rates for credit cards and auto loans in Q2 2023.
Credit card balances showed the most significant decline in performance this quarter compared to other debt categories. Student loan performance remained unchanged, with historically low delinquency rates due to the federal repayment pause that lasted until August 31, 2023.
Sources of American Indebtedness
American debt primarily comes from four sources: mortgages, car loans, student loans, and credit card debt. Of the $14 trillion debt, over $9 trillion is from mortgages, and around $1.3 trillion comes from car loans with low-interest rates since 2008.
Student loans make up a record-breaking $1.48 trillion of U.S. consumer debt, averaging about $35,000 per borrower. Credit card debt comprises the remaining $1 trillion, with an average consumer owing approximately $6,000 spread over four different credit cards.
The post-pandemic economic recovery has led to supply chain problems and inflation, reminiscent of the late 1970s, increasing the cost of goods due to global supply chain disruptions and the ongoing pandemic.
In nearly every category, average debt has risen compared to 2020, including household, credit card, mortgage, and auto loan debt, with a total increase of over $2.5 trillion since 2020. Personal and auto loans in hardship have also exceeded 2020 levels, as inflation continues to strain finances.
What Now
America’s debt crisis has worsened due to Covid-19, and a clear understanding of its causes can guide us toward financial stability. Creating and adhering to a budget is crucial, dispelling the notion that we constantly require more possessions.
While Americans appear overwhelmed by debt, there are strategies for debt repayment. Start by assessing your total debt, identifying its type (e.g., credit card, mortgage, auto loan), and tracking the amount owed, interest rates, and minimum payments for each.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
