The Current State of American Consumer Debt

Debt is a normal part of our financial system. Whether you need to buy a car or want to go back to school and finish your degree, few people have the financial resources to pay for major expenses in cash. Instead, consumer spending is typically done by taking out a loan to be paid back with interest. 

The economy constantly fluctuates in response to world events and new legislation, and many Americans wonder about debt given recent developments. Learn more about different types of debt and the average household debt in America if you’re concerned about the current economic situation and how it affects your financial health. 

Key insights on consumer debt in America

Nearly every American household carries some kind of debt. Every homeowner who hasn’t paid off their house has mortgage debt. But renters often have debt, too, from credit card balances to student loans.

Debt is any kind of money that one party owes to another. There are two main types of debt:

• Installment debt: This type of debt has a fixed repayment period and terms. For example, with a student loan, the borrower will pay a set rate each month toward the principal and interest. 
• Revolving debt: This type of debt is open-ended. Credit card debt is one of the most common types of revolving loans, in which you continually accrue and pay off your debt. As long as your account stays in good standing, you can keep a credit card open indefinitely.

Additionally, debt may be secured or unsecured. Secured debt is backed by collateral, unsecured debt isn’t. For example, if a person takes out an auto loan to help them finance the purchase of a new car, the vehicle serves as the collateral – the lender can repossess the car if the borrower doesn’t pay the loan.

Most debt comes from loans issued to individual borrowers by institutions like banks or credit unions. There are also informal types of debt – for example, a parent might lend their college-aged child $500 for car repairs, with the expectation that they will be paid back.

Interest rates, delinquency levels, inflation, and bankruptcy

Average American debt fluctuates, and the amount of consumer debt can provide some insights into the health of the overall economy. Many different factors affect consumer debt in the United States, including:

Interest rates

What do we mean when we talk about interest rates? In the U.S., monetary policy is set by the Federal Reserve System, a central bank that regulates lending institutions throughout the country. The Fed sets the rate at which banks can lend and borrow money to one another, known as the federal funds rate. 

When the Fed raises interest rates, it becomes more expensive for everyone to borrow money. This can mean higher rates for adjustable-rate mortgages and short-term loans like a home equity line of credit (HELOC).

When mortgage rates are high, some first-time buyers might put off purchasing a home and continue to rent. But others will buy anyway. The risk with higher interest rates is that your monthly payment will be larger and you’ll have less flexibility in your household budget. It will take longer to pay down the principal on your loan, and if you get behind on mortgage payments, your credit score could take a hit. 

Delinquency levels

Borrowers are usually classified as delinquent after they’ve missed two or more consecutive payments on a loan. If a consumer falls into debt, they may become delinquent on a credit card, car loan, or mortgage payment.

At the end of 2022, TransUnion, one of the leading consumer credit reporting agencies, reported that delinquency rates rose steadily throughout the year and would likely continue rising in 2023. TransUnion cited inflation and growing unemployment as two of the major factors affecting high delinquency rates.

Inflation

Inflation is another term you probably hear discussed on the news all the time but may not understand how it affects the average consumer. In simple terms, inflation is a measurement of how quickly prices increase. When people talk about inflation rates, they’re usually measuring how much more expensive goods and services have gotten over a year.

Higher inflation can mean that more consumers are at risk of going into debt. When the prices of everyday items like groceries and gas go up, your household budget doesn’t stretch as far, and it’s more difficult to set aside savings for emergencies.

Bankruptcy

Bankruptcy is a type of legal process. If a person cannot make payments on their loans, they can file a petition through the federal court system to seek debt relief. 

The bankruptcy process for individuals differs from the legal proceedings for a business. Most people file for what is called Chapter 7 bankruptcy, referring to the section of the applicable federal bankruptcy code.

Chapter 7 bankruptcy can help an individual dispose of unsecured debts. This can include:

• Credit card bills
• Medical bills
• Personal loans

To repay these debts in whole or in part, the petitioner may need to liquidate assets like investments or family heirlooms. Some assets, like personal vehicles, are exempt.

At-a-glance: Average consumer debt statistics

Your household debt can vary depending on your income, living expenses, family size, and access to credit. So how much debt does the average American have? First, let’s look at a few different types of debt:

Credit card debt in 2022

This is a very common type of debt: an individual makes purchases using a credit card, gets a monthly bill, and then pays off the debt from a checking or savings account. If the charges aren’t paid off in full, they’ll appear on the subsequent bill, along with an interest charge. Credit card agreements typically have a credit limit and a fixed annual percentage rate (APR). In 2022, the average credit card debt for a household was around $18,054. 

Personal loan debt in 2022

A personal loan is typically issued by a bank, credit union, or online lending service. Borrowers may take out personal loans to help pay for unexpected expenses, like a funeral or medical bill, or to help finance things like moving costs. Interest rates and repayment terms can vary, and personal loans are often unsecured. The 2022 average personal loan debt was $18,255, a slight increase from previous years. This includes both secured and unsecured personal loans.

Medical loan debt in 2022

A medical loan is a type of personal loan that usually has a fixed interest rate and doesn’t require collateral. A person might apply for a medical loan if they need to get healthcare that isn’t covered by their insurance, such as gender-affirming surgery or fertility treatments. Or they may need a loan after getting an unexpectedly high medical bill – perhaps they had to go to the emergency room and don’t have enough savings to cover the cost. 

Some borrowers use these loans to consolidate medical debt. For example, if a patient had multiple rounds of cancer treatments, they might want to roll all these medical bills into one monthly payment.

Medical debt can be difficult to track, as some patients pay for healthcare bills with credit cards or informal personal loans from family members. The Kaiser Family Foundation found that 40% of American adults have healthcare debt. Over 40% of individuals with medical debt owe at least $2,500, and 12% owe more than $10,000.

Student loan debt in 2022

Some loans are specifically for educational expenses, such as tuition and textbook fees. The federal government issues student loans, as do private lenders. Many people need student loans to help pay for the cost of attending a college, university, or trade school. Federal student loans often have fixed interest rates, while private loans can have variable rates that tend to be higher. Often, student loan programs allow deferment until the recipient graduates or leaves school.

In 2022, among Americans with student loans, the average borrower owed $28,950. Most student loan debt – over 90% – is federal; the remainder comes from a mix of private lenders.

Housing debt in 2022

Homeownership is a goal for many Americans. But because a home is such a major investment, few families can buy a home outright. Most homeowners need to take out a mortgage, usually through a bank or a credit union.

Mortgage Debt

A mortgage is a type of installment loan – the borrower makes monthly payments over a term. Most mortgages have 15 or 30-year terms. Mortgages may have fixed or adjustable rates. A fixed-rate mortgage means your monthly payment will stay the same. With an adjustable-rate mortgage, you may have a fixed interest rate for the first few years. Afterward, the interest rate could go up or down. 

If you get behind on mortgage payments, your home could go into foreclosure. This means the lender seizes the property and sells it to recoup their money. Among U.S. homeowners, the average mortgage debt in 2022 was $227,188. However, mortgage debt is often classified as good debt because your monthly payments are helping you build equity in your home.

HELOC Debt

A HELOC is a revolving credit line that uses the value of your home as collateral. Typically, when a homeowner is approved for a HELOC, they have set draw and repayment periods. Throughout the draw period, they can borrow as much money as they want, up to their credit limit. During the repayment period, they pay back the loaned money, plus interest, in monthly installments. 

While the terms and interest rates can vary, a typical HELOC has a 10-year draw period and a 20-year repayment period. HELOCs are often used to finance home repairs and renovations. In 2022, the average value of a HELOC was around $40,000.

What are the implications of this consumer debt?

Debt has an impact on the economy at large, but it also affects consumers on an individual level.

The immediate impact of debt

Household debt can affect a person’s health and well-being. Debt is linked to poor health outcomes, including depression, anxiety, and high blood pressure. 

Unsecured debts can also have cascading effects. For example, if a person can’t make payments on their auto loan debt, their car could eventually be repossessed. Without a car to get to work, they are at risk of losing their job. If they lose their job, they will struggle even more to make minimum payments on any loans, causing their debt to balloon quickly. 

Once their debt moves to a collection agency, the borrower can be under even more stress from repeated calls and letters from the collector.

The long-term impact of debt

In the short-term, household debt can boost economic growth: when families borrow more, they have more money to spend. In the long term, however, debt can prolong an economic downturn or recession. When families are struggling to keep up with loan payments, they have less disposable income to spend on consumer goods and services. Plus, missed payments and delinquency can negatively affect credit, making it more difficult for consumers to secure loans in the future.

What should I do if I’m in debt?

American Financial Solutions’ credit counselors can provide financial education to help you with family budgeting and debt management. We’ve helped more than 450,000 people pay off their debt. 

American Financial Solutions offers Debt Management Plans that consolidate your various loan payments into a single monthly payment. This can help you avoid fees, lock in an interest rate, and stop getting stressful phone calls from collection agencies. We also offer financial education classes to help individuals with debt management going forward, as well as foreclosure counseling. 

A word from American Financial Solutions

Debt can feel overwhelming, but there are resources to help you get back on track. At American Financial Solutions, we offer free one-on-one credit counseling sessions that can help you with budgeting and creating a plan to manage your debt. To learn more about our Debt Management Plan and other resources, get started today.

Published Mar 21, 2023.