Consumer debt is what you owe, as opposed to what a company or the government owes. It is also called consumer credit. It can be borrowed from a bank, a credit union, and the federal government. There are two types of consumer debt: credit cards (revolving) and fixed-payment loans (non-revolving). Credit card debt is called revolving because it is meant to be paid off every month. They make variable interest rates that are linked to Libor.
Non-revolving debt is not paid off every month. Instead, these loans usually take place for the life of the underlying asset. Borrowers can choose between loans with either fixed interest rates or variable interest rates. The most non-revolving debt is car loans or school loans. Although mortgages are also a huge loan, they are not a type of consumer debt.
Instead, they are personal investments in residential real estate.
In January 2019, the US consumer debt took 5.1% to $ 4035,000,000. That surpassed last month’s report of $ 4018,000,000,000. Of this, $ 2976,000,000,000 was non-revolving debt, and increased by 5.9%. The most non-revolving debt is education and car loans. In December 2018, the school debt amounted to $ 1569000000000 and car loans were $ 1155000000000.
Credit card debt amounted to $ 1058000000000, raising 2.9%. It surpasses the record of $ 1020000000000 set in 2008. But credit card debt is only 26% of the total debt. It was 38% of the total debt in 2008. The Federal Reserve reports on consumer debt every month. Here are historical statistics per month since 1943.
Why Americans are in So Much Debt
Why is the debt so high in America? There are three reasons.
First, credit card debt increased due to the 2005 Bankruptcy Protection Act. The law made it harder for people to file for bankruptcy. As a result, they turned to credit cards in a desperate attempt to pay their bills. Credit card debt reached an all-time peak of $ 102800 million in July 2008. That was an average of $ 8640 per household. The majority of this debt was to cover unexpected medical expenses. As a result, health care costs are the number 1 cause of bankruptcy.
The recession curtailed credit card debt. It fell over 10% in each of the first three months of 2009. During the recession, banks cut back on consumer loans. Increased the Dodd-Frank Wall Street Reform Act regulation on credit cards. It also created the Consumer Financial Protection Agency to enforce those rules. In addition, banks have tightened credit conditions. In April 2011, credit card debt had fallen to a low of $ 839,600,000,000. Despite these declines, the average American household still owed $ 7,055 each.
Car loans have increased so much due to low interest rates.
People took advantage of the Federal Reserve’s expansive monetary policy. The Fed reduced rates in 2008 to combat the recession. These loans are from three to five years. If the borrower fails to make payments, the bank will usually reclaim the underlying asset.
School loans increased during the recession as the unemployed sought to improve their skills. In 2010, the Affordable Care Act allowed the federal government to get over the student loan program. It replaced Sallie Mae, the previous manager. By eliminating the middle-man, the government cut costs and increased the availability of aid education. It helped boost non-revolving debt from 62% of consumer debt in 2008 to 73% in 2017.
School loans are for 10 years, but some are as long as 25 years. Unlike a car loan, there is no advantage for the bank to use as collateral. For that reason, the federal government guarantees school loans. That can offer banks low interest rates to stimulate higher education. The government encourages it because the country benefits from a skilled workforce. It reduces the nation’s income inequality and ensures a healthy economy.
How consumer debt benefits the economy
Consumer debt contributes to economic growth. As long as the economy is growing, you can pay off this debt faster in the future. That’s because your education allows you a better paying job. That creates an upward cycle, stimulating the economy even more.
This allows you to deliver your house, pay for education, and get a car without saving for them. That way, it supports the American dream.
Cons of Debt
But the debt can be devastating. If the economy goes into a recession, and you lose your job, you can be in default. That can ruin your credit score, and the ability to take loans in the future. Even if the economy remains robust, you can take on too many debts. It is not just because of the so-called poor spending pattern. It is also a result of unexpected medical bills.
The best way to avoid the disadvantages of credit card debt is to pay it off every month. Moreover, with the exception of six months, the value of the expenses becomes. That will kiss you if a recession hits, you lose your job, or that you face a medical emergency.