Consumer debt is what you owe, as opposed to what a business or the government owes. It's also called consumer credit. It can be borrowed from a bank, 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's meant to be paid off each month. They incur variable interest rates.
Non-revolving debt isn't paid off each month. Instead, these loans are usually held for the life of the underlying asset. Borrowers can choose between loans with either fixed interest rates or variable rates. Most non-revolving debt is auto loans or school loans.
Although home mortgages are also an enormous loan, they aren't a type of consumer debt. Instead, they are personal investments in residential real estate.
In January 2019 U.S. consumer 5.1% to $4.035 trillion. That surpassed last month's record of $4.018 trillion.
Of this, $2.976 trillion was non-revolving debt, and it rose 5.9%. Most non-revolving debt is education and auto loans. In December 2018, school debt totaled $1.569 trillion and auto loans were $1.155 trillion.
Credit card debt totaled $1.058 trillion, increasing 2.9%. It exceeds the record of $1.02 trillion set in 2008. But credit card debt is only 26% of total debt. It was 38% of total debt in 2008.
Why Americans Are in So Much Debt
Why is debt in America so high? There are three reasons.
Americans have turned to credit cards in a desperate attempt to pay their bills. Credit card debt reached its all-time peak of $1.028 trillion in July 2008. That was an average of $8,640 per household.
The recession curtailed credit card debt. It fell more than 10% in each of the first three months of 2009. During the recession, banks cut back on consumer lending. In addition, banks tightened credit standards. By April 2011, credit card debt had fallen to a low of $839.6 billion. Despite these decreases, the average American household still owed $7,055 each.
Second, auto loans have increased so much because of low interest rates. The Fed lowered rates in 2008 to fight 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.
Third, school loans increased during the recession as the unemployed sought to improve their skills. Unlike an auto loan, there is no asset for the bank to use as collateral. For that reason, the federal government guarantees school loans. That allows banks to offer low-interest rates to encourage higher education. The government encourages it because the country benefits from a skilled workforce.
How Consumer Debt Benefits the Economy
Consumer debt contributes to economic growth. As long as the economy grows, you can pay off this debt more quickly in the future. That's because your education allows you a better-paying job. That creates an upward cycle, boosting the economy even more.
It allows you to furnish your home, pay for education, and get a car without having to save for them. In that way, it supports the American dream.
Disadvantages of Debt
The best way to avoid the disadvantages of credit card debt is to pay it off each month. In addition, save up six months worth of spending. TThat will cushion you if a recession hits, you lose your job, or you face a medical emergency. in the future. Even if the economy remains, robust, you can take on too much debt. It's not just because of so-called poor spending habits. It's also a result of unexpected medical bills or unexpected financial situations.
The best way to avoid the disadvantages of credit card debt is to pay it off each month. In addition, save up six months worth of spending. This may seem unrealistic to most Americans, but a good goal to work towards.