Consumer Debt: A Quiet Epidemic
Even with widespread access to credit counseling agencies that can help consumers improve their financial situation and avoid filing bankruptcy, America is in more debt today than it was during the financial crisis of 2008.
By the first quarter of 2019, the total amount of consumer debt in America had already reached $14 trillion. According to MarketWatch, Americans accumulated approximately $13 trillion in consumer debt during the 2008 financial crisis, the year of the nation’s worst economic downturn since the Great Depression in 1929.
By 2018, the average American household owed around $144,100 in consumer debt. At that time, the breakdown in consumer debt was as follows:
- $9.4 trillion in mortgage debt
- $1.37 trillion in student loan debt
- $1.27 trillion in auto loans
- $834 billion in credit card debt
- $291 billion in personal loan debt
These totals may seem alarmingly high, but many financial experts believe that rising consumer debt in America could signify a growing economy. Learn what consumer debt means for the economy and find out if high debt could be signaling a coming economic downturn.
What does consumer debt mean for the economy?
While consumer debt reduction and elimination are key to financial health, it’s important to remember that the economy relies on consumer debt to finance short-term economic growth. According to Discover Bank, consumer consumption makes up more than two-thirds of the nation’s gross domestic product (GDP) — just one indication that the U.S. economy is actually growing despite the debt.
Rising consumer debt can also indicate that Americans are optimistic about the future of the economy, according to experts at Fox Business. It could signify that Americans are repaying their existing debts and qualifying for new loans.
As such, a rise in consumer debt can help businesses generate revenue while improving the financial health of the country as a whole. Debt also helps Americans to purchase the items they would not otherwise be able to afford, which in turn boosts the economy.
So, should we be worried about the nation’s need for debt relief and the rising amount of consumer debt? As long as the economy continues to grow and consumers can repay their balances or turn to debt consolidation or debt settlement as a personal solution, most economists tell us not to be overly concerned at this time. If the economy falls into another recession and consumers cannot repay their debts, however, this is when the rising amount of consumer debt becomes more of a problem.
Chapter 13 Bankruptcy and Other Concerns
While rising consumer debt may be a sign of a growing economy, a borrower’s inability to repay these debts can have the opposite effect on the country’s financial health.
According to financial experts at Discover Bank, rising consumer debt can hurt the economy when borrowers reach their spending limits, carry an outstanding balance and cannot use credit to make future purchases. Additionally, interest charges on purchases make it more difficult for borrowers to repay their debts in a timely manner, which can lead to other problems.
For instance, approximately 12 million consumers resort to payday loan help each year as a way to settle their outstanding balances. While payday loans can help struggling households to make ends meet until their next paycheck arrives, about 70 percent of borrowers use these loans to repay their debts, including payments on automobile loans. Since payday loans have a high interest rate, they often put borrowers into a deeper cycle of debt.
Furthermore, household debt can lead to an increased number of consumer bankruptcies. About 270,000 consumers filed for Chapter 13 Bankruptcy in 2006. By 2008, this number rose to about 350,000, followed by 430,000 bankruptcies in 2010.
However, this number has declined in recent years, with just 295,000 Chapter 13 filings in 2017.
Why is consumer debt so high in the U.S.?
Before we discuss debt relief companies and the different types of credit card debt relief programs that are available to assist borrowers, let’s look at the reasons for this recent increase in consumer debt. According to financial experts, potential reasons include:
- Lower home mortgage rates. When interest rates are low, consumers are more likely to refinance their homes or borrow money for a new home. On a 30-year fixed rate mortgage, the current average interest rate is just 3.98 percent. In 2008, the average interest rate on a home loan was 6.03 percent — with 5.10 percent being the lowest.
- Low interest rates on auto loans. Thanks to the Fed’s expansive monetary policy, interest rates were lowered in 2008 as a way to fight the U.S. recession. However, interest rates have been increasing during the last few years. In 2019, the average auto loan interest rate was 4.21 percent for a 60-month loan.
- Higher college enrollment rates. Since the financial crisis of 2008 forced many Americans out of work, some people turned to student loan debt in order to enroll in college and make themselves more marketable. According to the National Center for Education Statistics, approximately 1.9 million older adults were enrolled in college in 2007. By 2011, however, approximately 2.3 million adults between 40 to 64 years of age were enrolled.
- The Bankruptcy Protection Act. Upon the passing of the Bankruptcy Protection Act of 2005, more Americans turned toward credit cards as a way to pay their bills. Today, the average American owes about $6,354 in credit card debt. While credit card consolidation can help Americans to repay their debts in less time, consolidation loans have only helped about 52 percent of borrowers with more than $6,000 in credit card debt.
Where can Americans find the best debt help for their financial situation?
While rising consumer debt can be promising for the economy as a whole, individual borrowers need to repay their debts in a timely manner to protect the financial strength of their household.
There are several programs available to assist consumers in need of tax debt relief. These include:
- Consumer credit counseling. To assist borrowers in repaying their debts, the U.S. Government recommends credit counseling services as a viable option for developing a personalized repayment plan. However, counselors must be accredited by the Financial Counseling Association of America (FCAA) or the National Foundation for Credit Counseling (NFCC).
- Government debt relief programs. While the government does not sponsor any program that helps to relieve consumer debt, student loan and IRS debt forgiveness are available to qualifying borrowers.
- Consolidation. Consolidating multiple loans into one single account can help borrowers to manage their debts and sometimes even lower their monthly payments. According to U.S. News, some of the best consolidation companies include LightStream, Discover Bank and Marcus by Goldman Sachs.
- Debt settlement companies. While many financial experts recommend this option as a last resort, the average borrower settles his or her debts at about 48 percent of the unpaid balance. However, most companies will charge fees of around 15 percent of the original outstanding balance or the total amount paid. This option can also have a negative effect on the borrower’s credit score.