How would you handle $4 trillion of debt? Hopefully, you'll never have to answer that question – but America's total outstanding non-mortgage consumer debt is nearing the $4 trillion mark. (Add mortgage debt, and our total consumer debt tops $13.5 trillion.)
According to Federal Reserve data as of October 2018, non-mortgage consumer debt was just over $3.96 trillion and is on pace to break the $4 trillion mark before year's end. This debt includes revolving debt like credit cards ($1.037 trillion) and non-revolving debt including auto loans, student loans, and personal loans ($2.926 trillion).
LendingTree highlights the rise in consumer debt in their November 2018 debt report. Using Federal Reserve data, the report finds that our consumer debt has quadrupled over the last 24 years.
We passed the $3-trillion mark in 2013, and we've added $1 trillion to that in the subsequent five years. In contrast, it took us ten years to go from $2 trillion to $3 trillion and almost nine years to go from $1 trillion to $2 trillion.
There's little reason to expect consumer debt to slow down, especially over the holidays. LendingTree projects holiday spending to increase by over 5% – and a 6% change is possible based on the trend from 2012 through 2017. Just a 5% change in holiday spending should send outstanding revolving debt above $1.06 trillion and push total non-mortgage consumer debt over the $4 trillion mark.
We’ll be paying more interest on those purchases, thanks in part to the Federal Reserve’s expected interest rate hike. The Fed dropped baseline interest rates to near zero in the wake of the Great Recession and held them flat until the end of 2015. From late 2016 to date, the Fed has been increasing rates in 0.25% increments, pushing rates past 2% in October.
Fed rate increases are generally passed through to consumers in higher loan and credit card interest rates. LendingTree's data confirms the effect on credit cards. As of August 2018, the average credit card annual percentage rate (APR) was at 16.46% – approximately 3% above average 2015 rates. Average APR's are likely to rise further as the Fed recently announced a further interest rate increase carrying into 2019.
Higher interest rates increase our burden by making it more expensive to borrow money – but, so far, we seem to be handling our higher debt obligations.
LendingTree's research shows that delinquency rates are relatively low for most consumer debt. As of September 2018, credit card debt delinquencies were at 2.28% and delinquencies on other consumer debt were at 2.49%. Both have increased slightly since 2016 but are nowhere near their June 2009 peaks of 4.85% and 6.77%, respectively.
A stronger economy and recent wage increases may be improving consumer ability to tolerate debt, but there's no guarantee of a strong economy moving forward.
Is your consumer debt load rising or falling? Debt may be rising nationally, but your debt goal should be to add as little to America's $4 trillion debt as possible.
To avoid excess debt, your budget should be realistic. If there's no room to account for unexpected expenses – or to save for future large expenses – you must cut spending or look for other sources of income to plug the gap. Adam Carroll, Founder and Chief Education Officer of National Financial Educators Carroll suggests using the sporting analogy of "great offense" and "great defense" to address the shortfall. According to Carroll, "Great offense is, 'How do I make more money?'...Defense is, 'How do I decrease my monthly expenses to the absolute ridiculous?'"
You may not be able to avoid credit card balances and loans altogether, but with fiscal discipline, you can keep debt and interest payments to a minimum. You'll improve your credit score, reduce economic stressors, and do your part to reduce America's consumer debt.
If you want to reduce your interest payments and lower your debt, join MoneyTips and use our free Debt Optimizer tool.