50 Things To Know About Debt And How To Avoid It

Last Updated: September 10, 2020   MoneyHacker

While accruing debt at some point in life may not be avoidable, the consequences and negative outcomes of debt most certainly are avoidable. In American culture it is ‘business as usual’ to take on student loans for college, to take on a mortgage in order to buy a house, or to accrue credit card debt–as oftentimes the best way to build credit is by effectively using credit cards. In other words, consumer debt has become a fact of life in the financial maneuvering of Americans. Yet consumer debt also represents an impending crisis that cripples the lives of millions of people. Because despite consumer debt becoming somewhat commonplace in the minds of Americans, the consequences of mishandling debt can be anything but commonplace. 

This is due to the fact that not all debts are created equal. The extent and severity of debt and whether it constitutes a true crisis to the individual will depend on a multitude of factors to be covered in this guide, though the most central of these factors is the type of debt accrued and whether it is tied to a student loan, a mortgage, or credit card debt. For instance, it is not uncommon for individuals to have outstanding mortgages of $30,000, however if an individual held this same amount in credit card debt, it might constitute a true debt-crisis. 

Ultimately what determines the level of crisis or dysfunction for consumer debt is determined by the terms of one’s loan agreement, but also the norms and cultural trends surrounding the debt of the individual. In this guide, we will explore the story told by these norms and trends through the statistics of debt in America. More importantly we will conclude with some key takeaways aimed at understanding this story. Leveraging this understanding can help individuals to make smarter decisions and achieve higher levels of financial success throughout life’s various stages.

How Bad is Consumer Debt in America?

  1. According to the New York Federal Reserve, consumer debt neared $14 trillion in the second half of 2019. 
  1. By March 2020 the NY Federal Reserve reported consumer debt had jumped to $14.3 trillion–just before the damages of coronavirus began to compound in the US economy. 
  1. According to Debt.org consumer debt has continued to grow at alarming rates in recent decades within four main vectors–home loans, credit card debt, student loans, and automobile debt.  
  1. Reports suggest home loans or mortgages constitute a massive piece of the national debt pie–$9.4 trillion. 
  1. Rising mortgage debts however, are sometimes considered to be a sign of growth and recovery in the housing market. 
  1. Total automobile debt represents a smaller debt pool of $1.3 trillion but has been jumping by tens of billions quarterly.
  1. This growth in automobile debt is attributed to the Federal Reserve lowering interests rates on automobile loans to combat the recession in 2008. 
  1. Perhaps most alarming is student loan debt which grew a record amount, reaching the record amount of $1.48 trillion in Q2 of 2019.
  1. When the federal government assumed control of the student loan program in 2010, loans became guaranteed and interest rates were lowered, which resulted in the soaring student debts that continue to rise today.  
  1. Credit card debt reached $1.08 trillion in Q3 of 2019, though is considered ‘revolving debt’ as credit card debts are meant to be paid off each month. 

How Bad is Credit Card Debt in America?

  1. The modern day credit card entered the scene in the 1950’s and was hailed as economic genius, since it markedly increased the consumer buying power of Americans–however, the price for this increased power and financial mobility is steep. 
  1. According to Cardfacts.com, the average American household with at least one credit card holds nearly $10,700 in credit card debt. 
  1. According to the Federal Reserve, early 80% of American consumers have at least one credit card. 
  1. The average wallet is designed to hold three credit cards. 
  1. According to a recent report, the amount Americans charge to their credit cards has tripled since 2000, and now represents a figure of $3 trillion annually. 
  1. According to reports from the Federal Reserve, 46% of Americans carry credit card balances month-to-month with 60% reporting that they had an equal or higher balance as compared to the previous year–meaning many Americans simply do not pay off their credit card balances even in the long term. 
  1. The surging credit card debts of today can be attributed to Bankruptcy Protection Act of 2005, which made it much more difficult for individuals to file for bankruptcy–and in turn more Americans flocked to credit cards as financial solutions, pushing credit card debt to an all time record of $1.08 trillion in July of 2008.
  1. More than 189 million Americans have credit cards. 
  1. The average credit card holder has at least four credit cards. 
  1. Shockingly, reports suggest about 1 in 5 Americans have credit card debt that exceeds the amount of money in their emergency funds account. 
  1. A reported strategy for effectively managing credit card debts is to maintain an emergency funds account with 3 to 6 months worth of expenses that include paying off credit card balances in full–in other words, always have enough to pay off your credit card balance in full. 
  1. The higher the average income bracket of an American family the higher the average credit card debt they hold month to month.
  1. However, credit card debt often represents a greater amount proportionately to lower income brackets–where credit card debts often exceed 10% of the individual’s total income. 
  1. There is a gender divide in credit card debt and it’s not what you think: Men have an average of $7,407 in credit card debt while women hold an average of $5,425, which constitutes a whopping difference of 22%. 
  1. Studies suggest this difference is due to women being less likely to approve of outstanding credit card balances in general, and are less likely to use credit cards to purchase expensive luxuries.
  1. Experian reports that Generation X’ers (1967 to 1981) hold an average credit card balance of $7,750–a sum much larger than the average credit card balance of the Millennial $4,315.
  1. It is suggested that this massive differential is due to Gen X’ers growing up in a time of economic plenty, while Millennials grew up in a stark recession. 
  1. Alaskans hold the most credit card debt with an average of $8,515 reported as of 2017 with the next top five being as follows: Connecticut ($7,258), Virginia ($7,161), New Jersey ($7,151) and Maryland ($7,043) all of which are located on the East Coast.
  1. With student loan debts on the rise, reports suggest that 20% students shift some of the expense onto credit cards with the median credit card balance for these individuals reaching $2,500.

How Bad is Student Loan Debt in America?

  1. As of 2020, Forbes reports student loan debt is now the second highest debt category, behind only mortgage debts, and totals at $1.6 trillion between 45 million borrowers. 
  1. Student loans are the most common form of debt and borrowing activity in 18-24 year olds. 
  1. According to Forbes, student loans are not only becoming more common but also becoming higher in amount with the average borrowing owing $32,731. 
  1. Similarly, Forbes reports the worrying rate at which these loans are entering delinquency with 10.8% of loans being over 90 days late.
  1. While student loan forgiveness might come to mind, the US Department of Education reports that only a tiny fraction of total student loans are forgiven, roughly $71.9 million annually. 
  1. Over $1 trillion of student loan debt is owned by the Federal Government, and in September of 2018 the U.S. Treasury revealed in an annual report that student debt accounted for 36.8% of all U.S. Government assets. 
  1. According to Forbes, 65% of seniors who graduated in 2018 from public and private non-profit college in 2018 had student loan debt.
  1. Average student loan debt at public colleges is $25,550, which represents a massive jump of 25% since 2008; combined with a 15% jump to $32,300 for private non-profit colleges.
  1. Reports suggest that the majority of student loan borrowers are still in the process of paying back the loan in their 30s and 40s or even older. 
  1. Reports also suggest there is a major red flag concerning student debt is that around 65% of high-student-debt borrowers totally misunderstood or were confused by the terms of their loan agreement.
  1. One of the most helpful tips for avoiding the pitfalls of student loan debt is to find a helpful financial advisor which universities often provide to students without cost. 

The Big Picture of Debt in America

  1. There is a very real psychological cost of debt; some initial research suggests that 83% of individuals without debt reported being satisfied with life whereas only 70% of individuals with debt reported satisfaction. 
  1. Perhaps more interesting though is the research indicating type of debt impacting satisfaction differently–with 86% of individuals with mortgages reporting life satisfaction, while only 64% of individuals with medical debt reported life satisfaction. 
  1. Moreover, despite the ubiquitous nature of debt, over half of individuals report being ashamed of their debt, regardless of its type (medical – 76%, personal loan – 71%, credit card – 69%, auto loan – 61%, mortgage – 51%).
  1. Research indicates the age at which you receive your first credit card predicts your likelihood for accumulating debt. 
  1. Research shows that those who received credit cards at 21 to 24 accumulated the most debt, an average of $6,461, while those who received their cards at 18 to 20 accumulated less, an average of $6,050. 
  1. The same study shows that those who received cards before 18 accumulated only $5,537, however the best performing group is the group who received their first credit card at 25 years old or older with the best average debt of $4,324.  
  1. In a likely shock to nobody, financial debt impacts romantic relationships and marriages; one study shows however, that individuals waited 10 months before revealing their debt to their partner, which for context is usually after the first “I love you” and the meeting of parents. 
  1. Similarly, financial infidelity is reportedly common with 71% of individuals in serious relationships admitting to outright lying or omitting facts about their finances. 
  1. If you think debt might be a temporary reality, for many it is not–with research showing that three-fourths of Americans are in debt when they die.
  1. This research also shows 37% of Americans die with mortgages and 25% die with car loans, responsibility for which is often shifted to the family members of the deceased or extracted from the estate of the deceased.

How Does One Survive Debt in America? 

While the facts and statistics in the above guide are alarming, the reaction to them does not need to be fear or foreboding. Many of the worst elements of debt in America can be circumnavigated entirely by savvy decision making and a mature mindset. For instance, credit card debt will never accumulate into an issue if you do not spend above your means and pay off your balance monthly. A mortgage will not become a ball and chain of financial burden and stress if you plan your finances accordingly and do not overextend yourself. A student loan will not confuse or surprise you if you take the time to work closely with a financial planner to make the right decision for your unique situation. 

Let’s break this down into five key takeaways: 

  • Frugality may not be the soul of financial excess but it is certainly the soul of financial wellbeing. 
  • You might need to spend money to make money but you get to keep it if you don’t spend it–make sure real risks do not outweigh potential rewards
  • The consequences of debt often compound on future struggles or difficulty, which means it is always better to err on the side of caution. 
  • Life is unpredictable and with the unforgiving nature of debt, having emergency funds accounts is all but mandatory. 
  • In the era of ubiquitous debt, the need for individuals to work with financial planners is undeniable.