Naked Numbers: Consumer Debt in America

We all know that the government is deep in the debt hole, but what you may not know is that consumers are also in debt. Consumers take credit from different sources. Various unions, banks, payday loans, and other lenders make it easier to borrow money. Most of such credits are revolving which means that you have to pay periodically (usually, once a month).

There are some forms of non-revolving debts that are basically life-time debts tied to a certain property or asset. Most of such loans are school loans. Non-revolving debts are usually not accounted for when it comes to counting consumer debt.

Here Are Some Statistics:

By the February of 2018, consumer debt increased by a relatively small amount – 3.3%. This seems like a very small number, but the overall size of consumer debt accumulated by Americans is $3 trillion 867 billion. That is a lot.

Non-revolving debts (formed by auto loans and school loans) accumulated to a hug sum of $2.837 trillion with 40.5% coming from school debts and 39.1% coming from credits on cars.
The real deal is the credit card debt which is over $1.03 trillion with a monthly growth varying from 0.1 to 0.5%. This is a record and it does not seem to be the last one. Note that this amount is only 27% of the overall consumer debt.

What Causes This Problem?

One of the issues is the Bankruptcy Protection Act that was approved in 2005. This allowed many banks to press harder on the credit card front. As the difficulty of filing for Bankruptcy increased, people were basically forced to use various credit cards. The overall debt on this front increased to $1.03 trillion by July of 2008. This was averaging to a whooping level of $8.6 thousand per household. Note that most of expenses were related to various medical bills.

When the crisis hit the economy, banks decided to hold back credits. Within a year, the overall debt decreased by a huge margin. The following Dodd-Frank act implemented more regulations and a whole new agency was created (Consumer Financial Protection). Its sole purpose was to ensure that those regulations were properly implemented. From 2008 to 2011, the overall debt on credit cards was reduced by 18.4%. This did not lighten the burden on households. An average debt per family was about $7 thousand.

School and Auto Loans Did not Help

Lower interest rates allowed credit organizations to expand the clientele and push in the auto loans market. In 2008, the Federal Reserve decided to significantly lower rates and people were fast to capitalize creating massive amounts of debts with auto loans for 3-5 years. Creditors were happy to give away such credits since they could just reclaim the property if borrowers couldn’t pay back.

Many unemployed decided to bank on additional education amidst the uncertainty created by the crisis. Scores of people decided to take loans to pay for their education. Various government initiatives allowed consumers to take credits easier. The growth of this debt was very big. By 2017, the share of non-revolving debt increased to 73% (from 62% in 2008). This is a very impressive leap.

Another reason why this type of debt skyrocketed is that the government guarantees that it will be paid back. Some loans are for 25 years and they do have a relatively low interest rate since the government covers the debt if a borrower is unable to pay, but it still increases the overall size of the debt.

Giving people more opportunities to improve their skills and learn new professions is beneficial in the long run. In the end, all countries strive for a skilled workforce. In the long run, this should reduce inequality and promote healthier developments in the economy.

Debt Is not that Bad

You won’t believe it, but the growth of the debt contributes to the overall growth of the economy. The theory is that you can pay off your debts quicker as the economy keeps growing creating more opportunities to make money. Better education promises you a better position. Having better jobs with career opportunities is beneficial as you move upwards and level the playing field.

At the same time, debt is something to fear. The recession quickly destroys family that accumulate huge debt. Borrowers reduce their credit scores meaning that they won’t be able to take credit later on when it will be needed the most. Stagnant economies with massive consumer debt numbers also struggle due to ineffective spending.

As for consumers, you should try to make your payments in time and be more intelligent when it comes to spending. Try to save money and borrow only when you critically need it.