Old habits die hard. Even after the financial crisis, which saw record numbers of consumers default on loans or declares bankruptcy, debt continues to plague the vast majority of American households. At the end of 2016, household debt, which includes mortgages, equity loans and lines, installment loans, credit cards, auto loans and student loans, now exceeds $12.5 trillion – a nearly $500 billion increase over the prior year. On average, households now carry nearly $135,000 in total debt – an 11% increase since 2007. So, is your debt average?
Is Your Debt Average? A Look into Popular Debt in the USA
Although many households resolved to reduce their use of debt following the financial crisis, consumer debt has increased. Much of it is attributed to rising costs, and a significant portion is coming from mounting student loan debt, which, at $1.4 trillion, has recently surpassed credit card debt. The other financial reality is that, while costs have continued to climb, average wages have stagnated or even declined over the last decade. Medical costs have increased the most in the last 10 years, while food and housing costs have gone up significantly. College costs have slowed somewhat in the last few years, but they were high, to begin with. The surest way to reduce the use of debt – living beneath one’s means – is becoming more difficult for many households.
Are You Average?
Where do you stand with your finances compared to the debt average? Do you carry more debt than the average American household; or are you better off than most? Either way, knowing where you are in relation to the average should provide the motivation to ramp up your debt reduction strategy.
Average Student Loan Debt
Of all the different types of debt, student loan debt has seen the sharpest increase in the last decade. If you’re one of the 70% of college students to leave school with debt, you’re average if your balance is around $36,000. You’re also average if your student loan debt has caused you to delay life events such as marriage, buying a house or car, starting a family or it has prevented you from saving for retirement. Up to 50% of student borrowers attribute their student loans to delays with one or more of these life events. Each day, more than 3,000 borrowers enter or re-enter default on their student loans.
Average Credit Card Debt
For millions of Americans, credit card debt has been the real dream killer. Households carrying credit card debt report an average balance of nearly $16,500. That excludes households that carry no credit card debt or that pay their balances in full each month. Considering that the average annual percentage rate on credit card balances is 15.60% — an all-time high – a high credit card balance can eat up a big portion of the budget pie. If you make a 2% minimum payment on a balance of $16,500, your monthly payment will be $330 – as much as a car payment. Worse, if all you do is make minimum payments, it will take you 30 years to pay a total debt of $44,733 – enough for a college education. You can expect credit card debt costs to increase as interest rates increase.
Average Auto Debt
The average household now carries $29,000 of auto loan debt, which is up from prior years primarily due to increasing auto costs and consumers making lower down payments. Auto loan delinquencies are higher than in 2009 due primarily to an increase in subprime lending. Generally, your auto loan costs shouldn’t be any more than 5 to 10% of your gross monthly income.
Average Mortgage Debt
The average homeowner carries $195,000 of mortgage debt, and that is expected to increase to more than $200,000 in 2018. The good news is that mortgage delinquencies have been declining for several years, which could be attributed to historically low mortgage rates. Also, since the financial crisis, mortgage lenders have tended to be stricter with the debit-to-income ratio, requiring borrowers to keep the ratio below 43% (maximum of all debt payments, including mortgage, to income).
Average Personal Loan Debt
Due to the advent of online lenders, personal loan debt has increased significantly in the last few years. The innovations of fintech have created new opportunities in the once underserved market of people with less than great credit. Through online lenders such as Prosper, Lending Club and LightStream, borrowers can get quick access to lower cost loans. According to TransUnion, the average balance of personal loan debt is about $8,000. Depending on creditworthiness, personal loan rates can range between 6% and 28%.
When You Know You Have too Much Debt
You don’t really need to know if you’re above the debt average to know you’re in trouble. You know if you have too much debt if
- Your total debt payments total more than half of your income
- You are only able to make the minimum payments on your credit cards
- You’ve reached the credit limit on your credit cards
- You are declined for new credit cards or loans – due to much debt or a high credit utilization ratio
- You use credit cards or loans to pay for living expenses
- You use credit cards or loans to make payments on other debt
All of these are signs you are carrying too much debt, regardless of whether you are average or not. The debt average is just one tool to use when evaluating your finances.
Guest Author: Josh Wilson, a Millennial working to educate Millennials on debt, savings, and investing for the future.