During the financial crisis in 2008, there were many people in many different sectors of the U.S. economy pointing fingers and looking for somebody to blame.
While it’s likely impossible to settle on one single cause of the crisis and following recession, there was a common refrain: people living “outside of their means.”
In this context, analysts were mostly referring to individuals and families who took on mortgages that they couldn’t keep up with to buy houses they couldn’t afford. People taking on debt to finance lifestyles that otherwise would be out of their reach, though, has been a perennial problem in the wealthy U.S. economy, where debt is plentiful and lenders are happy to give out loans.
Nowhere is this problem more flagrant than with credit card debt. In America, it seems, people just can’t stop borrowing.
However, how bad is the problem? What caused it? How can Americans deep in credit card debt get out of it? We have some of the answers below.
How bad is American credit card debt?
According to NerdWallet, U.S. household debt is on a huge upswing. In the past decade alone, household debt has climbed an incredible 11% as Americans borrow more for a wide variety of different reasons.
NerdWallet crunched the numbers and came up with several harrowing, disheartening statistics. According to calculations derived from numbers from the Federal Reserve, the average American household owed $134,643 in debt as of the fourth quarter of 2016.
That’s right; your average Joe American family owes at least six figures worth of a variety of different debts to a variety of different creditors, and often more. Totaled up, Americans hold $12.58 trillion in debt overall.
Some of these debts are the usual signs of American middle-class bliss. Mortgage debt makes up about 67% of this debt, or $8.48 trillion. Next come student loans ($1.31 trillion) and auto loans ($1.16 trillion).
While you can easily argue that these debt numbers should be lower, it’s hard to deny that taking on a mortgage, auto loan, and student loans is a necessity if you’re going to break into the American middle class.
What’s not necessary, though, is credit card debt, which totals up to $779 billion, or about $16,748 for the average American household.
That debt is, in many situations, unnecessary and avoidable.
On top of that, credit card debt can be rather expensive debt to carry, with higher interest rates than many other forms of debt and a variety of different penalties for late payments. According to NerdWallet, the average American household pays $1,292 in credit card interest per year. That money goes right into the pockets of credit card companies just for the privilege of carrying debt month to month, money that could be going into savings accounts or financing other, more necessary expenses.
The cost of this debt affects some credit card users much more than it affects others. NerdWallet identified two distinct types of credit card holders with distinct approaches to their credit card debt.
On one hand, you have “transactors.” Transactors treat credit card spending like any other transaction. They use their credit cards on a regular basis, but before any interest can compound, they pay off the balance and zero the card out. Often, they do this in order to build up credit over time.
On the other hand, you have “revolvers,” who are attractive targets for credit card companies because they tend to pay a lot in interest over time. Revolvers carry some level of credit card debt month to month, often paying only their monthly minimum payments just to keep the collections agencies at bay. They pay interest on their balance each month just to stay afloat. Revolvers are how credit card companies make money.
As mentioned already, these individuals carry thousands of dollars of credit card debt over each month and pay tons in interest alone every year to credit card companies. These average costs, though, can vary widely depending on demographics, household income, and more.
Who is affected most by American credit card debts?
While we tend to think of credit card overspending as more common in households closer to the poverty line, NerdWallet found that, in reality, your debt load grows along with your income.
Households at the bottom rung of the income ladder (making less than $21,432 each year) pay on average $677.43 in credit card interest each year. That number goes up steadily depending on household income, with a slightly higher than average income range ($68,212 to $112,262 each year) lining roughly up with the average yearly interest payment of $1,292.
Households in the highest income bracket (making more than $157,479 each year) actually pay nearly double that number in credit card interest each year ($2,515.02 on average).
Employment status also plays into these averages. Your average employed individual working for someone else pays the least out of all categories in credit card interest each year, or about $1,210.58. Retirees pay just over $1,300 each year. While you’d expect the unemployed to pay the most, they actually come in second, just after self-employed individuals. People who aren’t retired but don’t work pay about $1,554.57 in credit card interest each year; the self-employed pay, on average, $1,630.84.
All of that said, despite the fact that wealthier and self-employed individuals pay more in credit card interest and tend to owe more credit card debt, that doesn’t mean that they face greater adverse effects from their debts than less wealthy households do. As with most things, it’s a matter of context.
As NerdWallet points out, a household making $150,000 per year has an average credit card balance of $10,036, or about 7% of its total income. A low-income household that makes $20,000 per year might hold an average balance of just $3,611. However, that balance represents 18% of that household’s total income and is a much more severe financial burden in context.
Is credit card debt on the rise?
Most projections indicate that American credit card debt is sure to rise in the next few years, as it has in previous years.
In 2013, credit card debt sat around $668 billion dollars, and it has risen ever since. That rise hasn’t been steady, as credit card debt tends to dip slightly in the first quarter of every year. However, the trend has been clear. By the end of 2016, credit card debt had risen to about $779 billion. At this rate, by the end of 2020, American credit card debt will total over $870 billion.
Total American debt follows a similar trend. Projections put all American household debt combined at around $14.125 trillion by the end of 2020.
With debt rising this steadily and this dramatically, you can expect to hear plenty of individuals claiming that the core cause of debt is people living outside of their means. Moreover, while there’s certainly some truth to these accusations (after all, living within your means will always be a sound financial plan), that’s not the only reason debt continues to rise.
Simply put, debt is increasing because it has become more and more expensive just to live as an American. The cost of living has outpaced income growth in the past, and that trend should continue well into the future. This trend is especially pronounced for many necessary expenses, such as healthcare, groceries, and housing costs, to name a few. As these costs become more expensive and income doesn’t keep up, Americans have found themselves turning to credit and debt more often just to get by.
The numbers themselves don’t seem that significant on paper. Income has grown at a rate of about 28% while the cost of living has grown at a rate of about 30%. Is 2% that big of a difference?
Yes, when you consider which expenses have spiked most dramatically. Let’s take medical expenses, for example. Since 2003, medical expenses have gone way up, to the tune of 57%. Income growth doesn’t even come close to accounting for that rise.
Now, imagine you’re an individual without much savings at the lower end of the income ladder. You have health insurance, but it’s not the best. You go to the doctor for a routine checkup and get some terrible news: you have a chronic health condition. While it isn’t immediately life threatening, you’re going to need frequent, expensive treatment, likely for the rest of your life.
How do you cover these costs? You can’t afford to pay for everything out of pocket. Your health insurance defrays the costs some, but not enough to make things simple. When the bills start to pile up and your savings account dries up, where are you going to turn?
For many Americans, there’s only one possible answer: you turn to credit card spending. After all, when the choice is between your physical health and your long-term financial well-being, staying alive is the easy answer.
Add situations like these in with the rising costs of education, housing, and other necessities, coupled with a less-than-stellar rate of income growth, and you can see why debt is likely to rise far into the future.
What can you do to avoid the dangers of rising debt?
If you’re worried about your long-term financial future, then you should be worried about the rising amounts of debt in American households, especially credit card debt.
In the big picture, rising credit card debt amounts can be precursors to deep financial recession. In late 2007, right before the financial crisis and following recession took place, credit card debt numbers were higher than they are today, hovering around $839 billion. While credit card debt wasn’t the only cause of the recession, it didn’t help. In addition, even if you were a financially responsible individual, chances are that the recession affected you or someone around you negatively in some way.
For most of us, though, it isn’t possible to influence that big picture and do much to prevent credit card debt amounts from rising. All we can really do at the end of the day is worry about ourselves. How, then, can you protect yourself from the dangers of rising debt?
The most obvious solution here is also the most difficult: get out of debt and insulate yourself from its negative effects. That’s harder than it sounds, of course, but it is possible.
Most financial professionals agree that the best way to get yourself out of debt in an expeditious and responsible fashion is to strategize and commit yourself to paying your debts down. While there are many different strategies for doing this, the basic solution is usually the same: pay more than you have to. Pick a debt that you’d like to eliminate and focus on paying it down as quickly as possible, paying more than the minimum amount each month to reduce the balance. Paying your debt off quickly also enables you to pay less overall on your debt, since you’ll cut down on interest payments as you go.
Some people, though, aren’t in a position where they are able to allocate extra budget towards paying down debt. They might already be living paycheck to paycheck without money left over at the end of the month to pay any extra.
Luckily, these individuals have a variety of solutions, including services such debt consolidation, which allows them to consolidate their different debts into a single payment that is often lower than what they were paying before.
If you’re interested in learning more about debt consolidation, National Debt Relief can help. We’ve helped indebted individuals pay off debts and regain control over their financial futures for years. Check out our reviews and contact us today!