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There are many reasons to go into debt, some better than others. Taking on an affordable mortgage, for example, can enable you to buy a home that you couldn't afford to buy otherwise. Taking out a student loan in order to get a good education that will increase your earning power for the remainder of your earning years is generally a good investment. When debt becomes a problem, some consumers turn to credit cards to live above their means or make up for budget shortfalls.
The standard determinant of affordable versus unaffordable debt is a consumer's debt-to-income ratio. High debt ratios (over 36% of income) are less affordable, obviously. Lenders commonly use this equation to assess a borrower's eligibility for a loan. It has also been used in several studies, as in the one cited by CNBC in an article outlining which American state has the highest debt and other states that also carry large amounts of debt.
Income plays a big role in debt levels. The higher the average income in a state is, the higher the average debt.
States with higher average income levels have most of their debt in the form of a mortgage. Consequently, states with lower average income levels have most of their debt made up as credit card debt.
There is a significant difference between the state with the highest debt and the state with the lowest amount of debt. In fact, California, the American state with the highest amount of debt, has double the amount of average debt as West Virginia, the state with the lowest amount of average debt.
Several states stand out when we look at which American state has the highest debt. The chart below outlines the 10 states with the highest per capita debt levels. There are some interesting numbers associated with why these states fall into the top 10. Let's look at the top five.
California tops the nation in debt-to-income ratio. According to a study cited by CNBC, consumers in California have an average annual income of roughly $28,000. When looking at their debt levels, Californians have an average of almost $66,000 in debt according to statistics gathered by The New York Federal Reserve. While this debt is mostly mortgage debt, it still represents a high debt-to-income ratio.
While Hawaiians have an average income slightly higher than Californians, they also have a higher per capita debt load. This debt load primarily consists of mortgage debt, as Hawaiians hold the second largest amount of average mortgage debt, roughly 77% according to the study.
Running a close third to Hawaii is Virginia. Virginians have a high average income, but like other high debt-to-income states, their debt per capita is also high. Virginia is different from its counterparts because of its low delinquency rates. This gives Virginians more access to credit. In addition, while a good portion of their debt is in mortgages, Virginians have quite a bit of their debt wrapped up in student loans.
Colorado has a similar debt-to-income ratio to Virginia; in fact, the numbers are interestingly close. One caveat in Colorado's numbers is that it has the second highest automobile debt of all the states in the top 10, according to the study, although it is quite a bit lower than the national average.
The standout statistic for Utah is its very low mortgage delinquency rate. This, similar to Virginia, allows Utah's consumers more access to credit because lenders feel better about extending it to them. Moreover, because the vast majority of debt held by Utah residents is mortgage debt, it's a friendly lending environment overall. Utah's debt numbers are actually somewhat favorable, even though it ranks in the top five.
Although there are some states that stand out when looking at which American state has the highest debt, the country as a whole is seeing household debt levels not seen since the financial crisis of 2008. In fact, a report released by the Center for Microeconomic Data at the end of the 1st quarter of 2017 showed that total household debt reached a high of $12.73 trillion. This is $50 billion higher than the previous high reached during 2008.
Those struggling with debt should look for ways to resolve their debt problems sooner rather than later. Waiting only limits options, and it usually makes the debt problem worse. If you have been turned down for a debt consolidation loan and are considering bankruptcy, consider working with a debt settlement company such as National Debt Relief first. Bankruptcy is never a good option; it is a catastrophic financial event for any consumer. Know your options so you can make the best financial decision for you and your family.