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Debt in America has been rising consistently over the last decade. Current estimates indicate that household debt in the U.S. has reached yet another high-water mark. Numbers from the first quarter of 2018 reflect an increase of $63 billion over the last quarter of 2017. This puts the current household debt number at a whopping $3.2 trillion. This means that household debt is nearly a half a trillion more than in 2008 when the economy was beginning The Great Recession.
Some of the increase can be attributed to an increase in the overall population in the United States, and the majority of the debt is classified as mortgage debt. This is good news, as it’s a far different scenario than what economists saw in 2008. Thus, most financial analysts aren’t worried about the significant increase in America’s debt.
Part of the reason for the lack of concern is that, while the growth is significant, it’s much slower than it was in the time leading up to the financial crisis of a decade ago. During the rapid and frenzied rise of the housing market prior to the bust, mortgage debt was rising as fast as home prices. Today, the rate of mortgage delinquency is falling, to a stunningly low percentage of 1.2%. In addition, the rate of subprime mortgages is very low, just 3% compared to the 15% level economists saw at the beginning of 2007.
Although mortgage delinquencies have remained very low, delinquencies on other forms of household debt are beginning to rise. Credit card debt, auto loans, and student loan debt have all seen the delinquency rate begin to creep up. Part of this is because there are still many subprime car loans being initiated. In fact, that number has reached almost 20%, a hefty percentage representing about $25 billion. Nearly 5% of those loans have a status of 90 days past due. This is fast approaching the number of delinquent auto loans that existed at the close of 2010.
On the upside, Americans have seen a significant increase in their wealth due to the steady and consistent rise in home prices, as these prices have recovered nicely from the low levels seen after the housing market crash. Still, we haven’t seen the rate of homeownership rise very much. This is especially true among young consumers just starting out. In fact, the rate of homeownership for American consumers under the age of 35 sits at only 35%. That’s in contrast to 43% just before the housing market crash. However, for those over the age of 65, the rate of homeownership has remained stable at around 80%. This is likely due to the implementation of increased credit standards in the wake of the mortgage crisis. This means that if the economy were to take a downturn, older consumers are least likely to be least affected.
Too Much Debt
The fact that there’s still a large amount of troubling debt in America should come as no surprise. For the most part, American consumers, especially younger consumers, are spenders, not savers. In pursuit of the “American Dream,” many young people have racked up far too much debt for their age. This is especially true when it comes to student loan debt. With the rising cost of tuition, many young people are starting out their adult lives with massive amounts of debt.
In one of the most egregious actions of recent history, the government has facilitated, through easy student loan money, a vast transfer of Federal money to the states, as universities have taken advantage of the student loan programs to reap much higher tuition costs from students. Additionally, Congress has made it impossible for students to get out from under this debt, even through bankruptcy, as student loan debt is one of the few debts that cannot be discharged.
Meanwhile, universities have lined their pockets with federal dollars at the expense of young college students seeking a better place in life. Now that the job market has caught fire under the Trump administration’s monetary policy, let’s hope that these young people will be able to find careers that pay enough to pay these loans back.
Other Reasons for Increasing Debt Among Americans
There are many reasons why Americans rack up large amounts of consumer debt, especially on credit cards. Many of these reasons stem from being irresponsible with money or not understanding the basics of managing money. However, there are times when consumers accumulate oppressive debt through events outside their control. Some of these might be caused by the broader economy, or they could be personal events.
Income growth not keeping up with the cost of living
In the last decade, the cost of living has outpaced the growth of income for Americans. This means that Americans have had a harder time making ends meet. When they feel a cash crunch or have an unexpected expense, many Americans turn to credit cards to cover the shortfall. Additionally, the rising cost of living and stagnant wages have made it harder for Americans to save money, or to keep emergency funds on hand. Young working families have the added burden of providing childcare if both parents work, which can box them into a financial corner. As expenses continue to rise, they find it impossible to increase their income. If they have no family help with the children, they can find themselves racking up a substantial amount of debt.
Seniors are another part of the population hit hard by the rising cost of living in the last decade. With most seniors on a fixed income, they have few options to increase income to bridge the gap. Unless they’re willing to work in their retirement years, seniors sometimes need to turn to credit cards to cover expenses. Prescription and other medical costs can create a heavy burden on the aged population.
Loss of a job
When the breadwinner loses a job, it can have a devastating financial effect on a family, especially a family that’s depending on only one income. This is particularly true if the loss of income is sudden and provides no severance pay. While the income may stop coming in, the bills don’t, and things can get very critical quickly. Even unemployment benefits can take several weeks to kick in, if they kick in at all. Moreover, unemployment benefits are usually very inadequate at covering even the most modest of expenses. If this is the case, a family may have no choice but to turn to credit cards or other lines of credit to make ends meet.
If they can, those who find themselves unemployed will take a job, any job, even if it pays a lower wage, while they continue to look to replace the income lost. This was a very common occurrence in the last decade when the economy was stagnant and the employment picture bleak. Being underemployed, meaning earning less than you’re qualified to earn, can be a difficult adjustment for families. Learning to live on far less income can be hard, especially if you were struggling already. This can sometimes lead to a rapid accumulation of credit card or other debt.
Divorce
Finances are always central to any marriage; if there are financial difficulties, this can sometimes put undue strain on an already struggling relationship. Today, though, many young people are waiting until later in life to marry, which means the chances of them staying together are vastly increased. Those who marry after the age of 25 have a much lower rate of divorce.
While the rate of divorce is actually on the decline, recently falling to a 40-year low, the financial impact of divorce on the parties involved is no less severe. Splitting a household into two separate households is expensive and difficult. Many times, while incomes stay the same, living expenses double. This can cause a rise in the use of credit cards to make ends meet. In addition, when single parents try to make it alone, they often find that one income isn’t enough to cover the bills.
Lack of money management knowledge and skills
Most Americans have been taught almost nothing about managing money by the time they’re on their own. That’s because money management, finances, saving, and investing aren’t part of the regular curriculum taught in American schools. Combine that with the fact that so many graduates are burdened with enormous student loan debt and it’s a difficult start in life for many young people. With the job market being sluggish in the last decade, many students have found themselves trying to make a living and pay back enormous debt on minimum wage jobs.
Because of this, we’ve seen a large amount of credit card debt growth among young people. Credit cards have been incredibly easy to obtain over the last decade, along with many other kinds of credit, such as car loans. These methods of getting by have become the norm for many young people who have no knowledge of how to budget their money, reduce their expenses, or supplement their income.
Several websites offer helpful information to anyone looking to increase their knowledge of financial management and budgeting. While it takes some time and patience, educating yourself on smart money management is entirely possible.
Medical expenses
Often times, crushing debt can accumulate quickly if someone becomes unexpectedly ill or suffers an injury. This can happen even with a good health insurance policy, as deductibles, copayments, and other out-of-pocket expenses add up quickly. This situation can be especially difficult if the injury or illness keeps someone from going to work and he or she doesn’t have adequate sick leave to cover the time off.
It’s common for someone in this situation to utilize credit cards or other consumer lines of credit to make ends meet, or to help pay the medical bills. Those with large balances with a health provider should look to negotiate those balances down. It’s common for hospitals to give a discount for bills paid in full. If you’re unable to pay in full, negotiate a payment plan so you don’t face credit-damaging collections.
No savings
Unfortunately, it’s estimated that most Americans have less than $1,000 in a savings account to fall back on. Over the last decade, with the economy sluggish, wages stagnant, and the employment market flat, it has been a very difficult road for many Americans when it comes to surviving, not to mention trying to build wealth. This has left the vast majority of Americans vulnerable to many of the financial pitfalls outlined above.
It’s recommended by money managers that consumers hold in reserve about three months’ worth of household expenses. With the economy now improving and opportunities opening up, many consumers are now able to build up their emergency funds. Whether it’s taking a second job, starting a side business, or selling off unneeded and unwanted items, smart savers are finding great ways to hedge against financial threats.
While household debt in America is sitting at a somewhat alarming number, many Americans are beginning to find ways to get ahead. By utilizing smart money tactics to reduce their debt and start savings accounts, consumers are poised for more prosperity than they’ve seen in a decade. Combined with a roaring economy, a strong housing market, and a solid job market, that makes for a bright financial future for many Americans.
