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Debt can be an investment when applied toward things like your mortgage or education, but it can also be a major burden that hinders Americans from feeling true financial freedom. As the cost of living increases disproportionately to income, many Americans rely on credit cards and loans to make ends meet. This financial strategy has many adverse effects.
What does consumer debt look like for Americans today? How much interest are Americans bound to as a result of their consumer debt decisions? Who is the most affected by debt? And, what steps can someone take to free themselves from debt?
How much debt does the average American have?
The New York Federal Reserve predicts that total household debt will reach its record peak of $12.68 trillion in 2017. The average household debt, including mortgages, is $134,643, and the total amount of debt owed by American consumers is $12.58 trillion. To put this in perspective, Americans have now borrowed more money than they had at the height of the credit bubble in 2008.
Here is what the breakdown, by type of debt looks, for the average American:
|Type of Debt||Total owed by average U.S. household||Total U.S. debt|
|Credit cards||$16,748||$779 billion|
|Auto loans||$28,948||$1.16 trillion|
|Student loans||$49,905||$1.31 trillion|
|Any type of debt||$134,643||$12.58 trillion|
What is the average interest rate by debt type?
According to BLS, the average household income has grown, but unfortunately so has the cost of living – at a disproportionate rate. Household income has grown by 28% in the past 13 years, but the cost of living has gone up 30% in that time period, which means stretching a paycheck in modern times can be more difficult than in generations past. Turning to consumer debt shouldn’t be the answer – especially if you leave revolving balances on loans. Interest on debt can add up to hefty annual interest payments which bring consumer’s further away from financial freedom.
The current average interest rates assume a purchaser is eligible for the lowest advertised interest rates.
- Current credit card interest rates: 15.59%
For a consumer that pays $277 a month, the first year of interest with amortization is about $2,766.18
- Current mortgage interest rates: 3.95%
For a 30-year loan, the first year of interest with amortization is about $7,474.24
- Current auto loan interest rates: 3.24%
For a 60-month loan, the first year of interest with amortization is about $921
- Current student loan interest rates: 4.29%
For a 10-year loan, the first year of interest with amortization is about $2,225.04
If you are a consumer who pays each of the debts listed above, you could be paying more than $13,000 each year on interest alone.
Debt trends on the rise
Student loan debt has been the most astonishing and fasting growing debt in the U.S. over the last decade – it has grown 186% and accounts for 11% of total household debt. However growth has slowed in this sector, and medical debt, placed under the “any type of debt” category, is slowly becoming an important figure to track.
In a 2016 study conducted by the Kaiser Family Foundation and the New York Times, among the insured with medical bill problems surveyed, 63% reported using up most or all of their savings and 42% took on an extra job or worked more hours to cover the mounting bills.
What does debt by age look like?
According to a study done by the Urban Institute, average American debt patterns fluctuate by age:
- The highest percentage of consumers have credit card debt in their 30s through early 70s.
- Student loan debt is most prevalent in a consumer’s 20s and 30s.
- Auto debt is highest in a consumer’s 30s through 50s.
- Mortgage debt is most common in someone’s 30s through early 60s.
Credit card debt is typically the most expensive and consumers the longest span of a consumer’s life. What does credit card debt look like by age? According to ValuePenguin, the breakdown looks something like this:
- Less than 35 years has an average of $5,808 in credit card debt
- 35 to 44 years has an average of $8,235 in credit card debt
- 45 to 54 years has an average of $9,096 in credit card debt
- 55 to 64 years has an average of $8,158 in credit card debt
- 65 to 69 years has an average of $6,876 in credit card debt
- 70 to 74 years has an average of $6,465 in credit card debt
- 75 and over has an average of $5,638 in credit card debt
How can you lower your debt?
List your debts by interest rate
List each of your debts from highest to lowest interest rate. The debt with the highest interest rate is costing you the most money, so paying that one off first will help lower your monthly obligations the fastest. Alternatively, you can also try the debt snowball method.
Make more than the minimum payments
Paying more than the monthly minimum will allow you to pay your debt faster, and with less interest accumulated. Conversely, missing the monthly minimum payments will cost you increased interest and late fees.
Make a budget
Budgets help you prioritize and focus on spending your money to pay down debts and saving for future financial goals. Budgeting is simply balancing your expenses with your income to ensure you can cover your basics, and help get yourself out of debt.
Transfer your balances
If your credit score allows, it might make financial sense to transfer your credit balances. Some balance transfer credit cards offer a introductory period of 0% interest which can help you catch up – just don’t miss a payment or the interest rate could skyrocket on you.