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Americans and their Debt

Updated: Jan 16, 2020

If you do an online search looking for information about American household debt levels, the titles of the articles paint a pretty scary picture:

  • It’s Official: Most Americans are Currently in Debt

  • Debt: Will Debt Doom America?

  • New Survey Exposes America’s Credit Card Problem

  • Survey: 79 Million Americans Have Problems with Medical Bills or Debt

  • Americans are way more in debt now than they were after the financial crisis

According to Investopedia, “debt is an amount of money borrowed by one party from another…under the condition that it is to be paid back at a later date, usually with interest.”

Here are some common debts American households carry:

  • Mortgages: In 2019, Americans have more mortgage debt than ever (yes, more than pre-recession). Mortgages make up the biggest piece of American debt. In general, having a mortgage is not a bad thing in the US because a) interest is tax deductible, b) house prices generally rise and this equity increases the household’s net worth, and c) borrowing for a mortgage is inexpensive due to low interest rates, compared to other loans.

  • Auto Loans: Approximately 1 in 3 Americans have an auto loan. We borrow over $20,000 for used cars and over $30,000 for new ones. The average interest rate on these loans is between 7 and 11%, with payments around $400 to $500 per month. You can read more about Adulting Is Easy’s take on auto loans here. Moral of the story is to get a used car you can pay cash for in the first place if you can. At the very least, don’t get another car immediately after paying yours off.

  • Credit Card Debt: At the start of 2019, Americans had over $1 trillion in credit card debt (at an average APR of 20.9%). That’s only slightly less than 2008-2009, at the start of the Great Recession. On average, we have between $5,000 and $10,000 in credit card debt. This is daunting because we’re are still living in a strong economy. You have to wonder what will happen during the next downturn. If you have credit card debt, try to consolidate balances and lower your interest rates.

  • Student Loans: About 45 million Americans have student loan debt, which totals over $1.5 trillion. Of the class of 2018, 69% graduated with student loan debt. Additionally, 14% of their parents took out loans for them as well. The average student loan payment is about $400. Student loans are not all bad. It is important that the student graduates with a degree that allows them to make more money than if they hadn’t gone to school at all. The New York Times recently pointed out that it’s better to take out a loan than drop out. Parents should not take loans out because they should be saving for retirement – their kids can borrow for school; they can’t borrow for retirement.

  • Medical Debt: Approximately 1 in 6 Americans have out-standing medical debt for a total of $81 billion – and many of those people have health insurance. This debt is not tracked as well as the others because hospitals sometimes write it off, and patients could use a credit card or forgo paying another expense. What most sources agree on is that medical debt is increasing.

According to CNBC, in 2018 average personal debt was $38,000 (excluding mortgages), of which 25% was on credit cards. And the debt levels ranged from $22,000 - $42,000 depending on age – not as much variation as you might initially think.

You may be curious if you have too much debt. To make things easy, let’s think the way a mortgage lender would. No more than 28% if your gross income should go to housing expenses (including utilities). When you add in monthly payments on other debt (auto, student loan, etc.), your debt to income ratio should not exceed 36%. Note that these are absolute maximums and it’s a good idea to stay below them if possible.

Do you carry too much debt? It’s OK if you do – the first step is recognizing there is a problem. Now it’s time to work on paying it down.

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