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It's very easy to overspend using credit cards. Buying something you really want without having to pay for it can be too tempting to resist. However, more often than not, if consumers are using credit cards rather than cash, they're buying something that they really can't afford. That means that when the bill comes, they won't be able to pay the balance off in full. Carrying that balance month to month means accruing interest charges. Over time, that purchase could end up costing a whole lot more than the original purchase price.
If you're carrying balances on your credit cards, you aren't alone. According to the Federal Reserve, the average household in America carries more than $16,000 in credit card debt. Add this to student loan debt, mortgages on homes, and automobile loans and America's debt load is steep. Additionally, household debt has been steadily rising in recent years. In fact, now that the economy is finally growing again and interest rates are still relatively low, household debt has reached an all time high and shows no signs of slowing down. In 2017, household debt reached a level not seen since the Great Recession when millions of Americans were caught in the housing collapse and the economy crashed. With consumer confidence soaring, Americans feel better than ever about spending.
Credit card debt demographics
Demographics play a key role in determining who holds America's debt. As an example, men have significantly more credit card debt than women do, and older people hold more debt than younger people do. The highest amount of debt is among consumers between the ages of 35 and 54. After that, debt levels seem to decline. Some consumers carry debt well into retirement, but most don't. In fact, consumers over the age 75 carry the least amount of debt.
Most likely, debt rises in mid-life due to the growth of families and their needs during this time. However, studies also show that young people today are earning significantly less than their parents were at this age. In fact, those consumers who fall into the group known as Generation X have the highest burden of credit debt due to the impact of the Great Recession. These consumers took the hardest hit to their wealth.
There's also a direct correlation between income and levels of credit card debt. As would be expected, high-income earners carry more debt than their lower income counterparts do. Contributing to this statistic is the higher availability of credit to higher income earners.
The income gap
In the last decade, consumers have seen the cost of living rise faster than income. This has made it increasingly difficult for consumers to keep up with the everyday expenses of life. As they fall further behind, they become more and more dependent upon credit cards to fill in the gaps.
In addition, American consumers are notoriously poor savers. In fact, estimates say that most Americans have less than $1,000 in savings to fall back on. This means that when faced with an unexpected expense, such as a car repair or a medical bill, consumers have no choice other than to take on more debt to handle it. This has caused household debt levels in America to rise steadily over the last decade.
Where do you stand with your debt?
Understanding where you stand with your debt compared to other consumers is simply a matter of comparing numbers. If your credit card debt is less than the average amount of $16,000, then you may feel good about where you stand. However, this number only includes those who actually have debt, not those who don't. When factoring in all households, the average amount of debt drops to around $5,700. So, while your number may seem good by comparison, remember that there is a whole group of consumers carrying no debt. This is where every consumer should strive to be. If you're carrying debt, you should be looking to stop accumulating credit card balances and put together a plan to start paying it down.
The Federal Reserve has begun raising interest rates recently after nearly a decade of near zero rates following the financial meltdown of 2008. It's likely that it'll continue to raise rates throughout the coming year in order to stave off inflation. This is going to make paying off your debt more costly and more difficult. As income growth continues to lag behind the rising cost of living, consumers are going to have cut overhead costs, increase their incomes, or both, to avoid accumulating more debt.
Let's look at where consumers stand today and where household debt numbers may be going in the not-so-distant future.
Credit card debt
The amount of household credit card debt held by consumers now stands in excess of a staggering $820 billion. While the delinquency rate on America's debt is much lower than it was at the beginning of the Great Recession, the number is still alarming. There has been an uptick in delinquencies in the last few quarters, however. Unfortunately, there's no sign that this trend will slow down or reverse itself. Recent studies suggest that the amount of household credit card debt will reach nearly $845 billion by 2019. This conclusion was reached by carefully analyzing the data churned out by the Federal Reserve Bank of New York.
The data also shows that over 38% of all households carry some kind of credit card debt, and that households with a net worth of zero or less carry an average credit card debt load of over $10,000. Average balances are higher in the northeast and west coast areas of the country. The average interest rate that consumers are paying on their credit cards is over 18%. As the Federal Reserve raises rates over the next year, minimum payments will also begin to rise. This means that consumers will pay more interest over the long haul and will be paying these balances down over a longer period. Consumers would be wise to start formulating a plan to pay off their high interest credit cards as quickly as they can.
Personal loan debt
Over the last decade, a lot of investor money has gone into the personal loan arena. This has set off a boon in the personal loan market, a market that was previously a very stagnant loan category. Consequently, the personal loan market has seen growth rates in the double digits. However, this incredible growth has seemed to stabilize in the past year. Loan originations declined in 2017 for the first time in five years.
So, what exactly, is a personal loan? These are unsecured loans made to consumers, meaning there's no asset required as collateral. Unlike credit cards, they have a defined repayment plan. The payments are a fixed amount for a period of months or years.
Lenders now have access to a vast amount of information about potential borrowers. Credit bureaus have centralized, and credit-scoring models have become more and more sophisticated. This has allowed lenders to have a better sense of ease when issuing unsecured loans. Now, lenders can make a quick and informed lending decision, often in one day. These decisions rely mostly on statistics, averages, and historical data and less on the judgment of an underwriter. This has made the personal loan market a more inviting and viable business enterprise to many lenders. Because of the great tools available to lenders, delinquency rates are very low, averaging less than 1%.
This has added fuel to the growth of personal loans and brought personal lending into a respectable section of banking and finance. While the personal loans of old carried a stigma and a high interest rate; today, consumers have access to a wide variety of personal loans and competitive rates based on their income and creditworthiness.
Today, the average personal loan balance stands at about 8,000 with an average interest rate between 6% and 10% for borrowers with good credit. Consumers can benefit by using a personal loan to pay off high-interest credit cards. Credit scores can be improved by lowering the credit utilization number (the percentage of available credit being used) as long as the individual doesn't run up balances again later.
Student loan debt
Student loans represent a large swath of America's debt statistics. As a group, Americans owe more than $1.45 trillion in student loan debt. This group is comprised of more than 44 million borrowers. Student loan debt eclipses credit card debt in the U.S.by more than $620 billion. According to the Federal Reserve, the average student graduating college in 2016 had approximately $37,000 in student loan debt, an increase of 6% over the previous year. Delinquencies on student loan debt run in excess of 11.2%, meaning those that are 90+ days delinquent or in default. The average payment for a student loan for those borrowers ages 20 to 30 is approximately $351. The pace of student loan borrowing has slowed in the past couple of years, but it's up over 186% over the past decade. The recent slowdown is, most likely, due to lower college attendance.
Automobile loan debt
In recent years, Americans have purchased automobiles in record numbers. Most consumers have needed to take a loan in order to make the purchase. As a result, according to the Federal Reserve Bank of New York, a record number of people now have automobile loan debt, over 107 million people. That represents about 43% of all adults in America.
To understand the growth of the auto loan market, one only needs to compare those numbers to 2012 when only 80 million U.S. consumers held car loans. Notably, mortgage loans outpaced car loans in 2012, but those two categories have now flip-flopped. The auto loan market peaked in 2016 and has been on the decline ever since. Not surprising, more that 6 million consumers are behind on their car payments.
Mortgage loan debt
Since the housing sector meltdown in 2006 through 2009, homeownership has been declining. Banks are hesitant to lend money to borrowers for new mortgages. Even with banks gradually lowering down payment requirements, mortgage originations remain stagnant and the mortgage market has failed to recover. Bottom line: many Americans cannot afford to buy a home.
So, what's the current state of the mortgage debt in America and where's it going? Let's look at some key statistics driving the mortgage market.
Currently, according to the Federal Reserve, America's debt related to mortgages stands at roughly $9.9 trillion with an average balance of $137,000. The average balance for a new mortgage is approximately $244,000. Borrowers that obtained a new mortgage had a median credit score of 754 and were required to make a down payment of roughly $12,800.
Some good news is that real estate values have finally surpassed the values seen prior to the housing crisis. However, with homeownership falling, more and more Americans are finding their wealth is becoming increasing concentrated in real estate.
Delinquent loans and credit cards
As subprime lending continues into the coming year, delinquencies will also increase. The predicted rise in interest rates will also cause delinquencies to rise on credit card accounts, auto loans, and variable rate loans and mortgages. While this isn't a great trend, delinquency rates are still relatively low across the board, especially when compared to those during the financial crisis. However, there's definitely some concern in the auto loan market, as delinquencies seem to be rising at a more rapid pace.
Even still, consumers would be wise to curtail their spending and work to pay off and any debt that could become worse due to rising interest rates. Start by paying off any high interest debt you have as fast as possible. Doing so could insulate your financial future from significant changes in the credit market.