15 Scary Facts About Debt That Should Alarm You
Debt is as American as apple pie. Whether we’re taking out loans to pay for our dream home, get behind the wheel of our dream car, or go back to school to earn a degree, we’ve made borrowing a national pastime.
Eighty percent of households in the United States have debt, a 2015 report from the Pew Charitable Trusts found. Most borrowed to buy a house, but more than 30% owed money on their credit cards, and 21% had student loans. All-in, the average balance was $67,900.
The tough truth is that getting by in America today without borrowing money is tough. Most people can’t afford to pay for college or a house in cash, so they turn to loans. But many fear that Americans aren’t being smart about how they use debt. Eighty-five percent of the individuals that the Pew polled believed people were using debt to live beyond their means, and 79% said they didn’t think Americans were responsible borrowers.
The evidence, unfortunately, suggests those debt skeptics might be right. From the trillions of dollars we owe on student loans, credit cards, and car loans, to the 300% interest rates charged by payday lenders, here are 15 truly frightening facts about debt in America.
1. Americans are $12.58 trillion in debt
When you add up all the money Americans owe on their mortgages, student loans, cars, credit cards, and other lines of credit, the sum is $12.58 trillion dollars — more than the entire gross domestic product of China. Our total debt grew by $226 billion (1.8% increase) in the fourth quarter of 2016 alone, according to the Federal Reserve Bank of New York, and is now just a hair below the peak of its 2008 third quarter crash of $12.68 trillion. Mortgage debt accounts for more than two-thirds of what Americans owe.
2. $412 billion in debt is seriously delinquent
High consumer debt totals sound alarming, but it’s not necessarily cause for panic. Spending, often with borrowed money, fuels the U.S. economy. But debt becomes a big problem when people can’t pay it off. About 5%, or $607 billion, of all American debt is delinquent, meaning people haven’t made payments on their loans for 30 days. A big chunk of that — $412 billion — is seriously delinquent, with borrowers being 90 days or more behind on payments, according to the Federal Reserve Bank of America.
3. The average household owes $16,091 on their credit cards
National debt totals are eye-popping, but they don’t tell us a whole lot about the typical American’s financial situation. At the end of 2016, the average person had $5,437 in credit card debt, according to credit reporting agency TransUnion. Among families that actually use plastic, the debt totals are even higher, with the average household carrying $16,091 in credit card debt, NerdWallet found.
4. It will take 18 years to pay off the average credit card balance
When people use their credit card to pay for their next vacation or a new pair of shoes, they may be taking on a debt that will linger for years. If your family is carrying the average credit card balance of $16,091 on a card with a 12.41% APR (the national average, according to the Federal Reserve), it will take you almost 18 years to pay off the debt if you only make minimum payments, according to this Bankrate calculator.
5. People vastly underestimate how much they owe
Signing up for decades of debt is bad enough, but research shows that many Americans also vastly underestimate how much debt they actually have. NerdWallet compared credit card debt totals reported by lenders with estimates from consumers of what they owed, and found a $415 billion discrepancy.
Some of that difference had to do with unintentional variations in reporting. A portion of that discrepancy probably stemmed from people being embarrassed about how much money they owed, and by dishonestly telling researchers their credit card balances were smaller than they really were. Unfortunately, debt denial will only make an already bad situation worse.
6. Credit card interest costs Americans $1,300 every year
Debt is expensive. Households with credit card debt pay an average of $1,292 in interest every year, NerdWallet estimated. That will increase to $1,309 per year if interest rates rise by one-quarter of a percent, as many believe they will. A low-income household with credit card debt may end up spending 3% or more of their income on interest, NerdWallet found.
7. 22% of people have more credit card debt than savings
Nearly one-quarter of Americans owe more on their credit cards than they have in emergency savings, a 2016 Bankrate survey found. Low savings and high debt can be a recipe for disaster. Without the financial cushion of an emergency fund, a job loss or other emergency could have you reaching for your credit cards to pay for essentials, leading you to spiral further into debt.
8. Auto loan delinquencies are up 21% since 2012
Credit cards aren’t the only kind of debt Americans need to worry about. Collectively, we owe more than $1 trillion on our car loans, according to the St. Louis Federal Reserve Bank, with an average debt of $18,435 per borrower. A small but growing number of people have run into problems making those payments. Auto loan delinquencies were up 21% from 2012 to 2017, TransUnion found, with 1.4% of borrowers being 60 days or more behind on their payments.
Defaulting on any kind of loan is a financial blow, but car loan defaults are especially devastating because your lender may repossess the car. Without a car, it can be difficult (or even impossible) for many people to get to work. That, in turn, can lead to job loss, which will only make a bad financial situation worse.
9. Total student loan debt is more than $1 trillion
Americans have $1.31 trillion in student loan debt, according to the New York Federal Reserve Bank. Today, student loans make up 10% of all consumer debt, more than double the share a decade ago.
About 11% of all student loans are delinquent. Defaulting on your student loans can destroy your credit, lead to wage garnishment, and jeopardize your Social Security income. Even people who are keeping up with their payments often put off buying homes, having kids, or getting married.
10. Baby boomers and Gen Xers have the most debt
Millennials may be burdened by student loans, but they’re not the most in-debt generation. That dubious honor goes to baby boomers and Gen Xers, who both have an average of just over $42,000 in non-mortgage debt, Experian found. Millennials owe $32,698 in non-mortgage debt, roughly on par with what the silent generation owes.
11. There are more payday loan stores in the U.S. than there are McDonald’s
Of all the ways out there to borrow money, payday loans may be one of the worst. These short-term loans have an average APR of close to 400%, making it all too easy for borrowers to fall into a debt trap from which it’s hard to escape. Eighty percent of borrowers end up rolling over their loan or reborrowing within 30 days, the Consumer Financial Protection Bureau found, a move which causes fees and interest to pile up.
These nasty loans are surprisingly easy to get, too. In 2015, there were 15,766 payday loan stores operating in 36 states, compared to 14,350 McDonald’s restaurants around the country.
12. Auto title loans are a borrower’s nightmare
Auto title loans are payday loans’s unpleasant cousins, sharing the same sky-high interest rates and fees. These loans, which allow people to borrow against their car and frequently end with the vehicle being repossessed, come with an average APR of 300%, Pew Research found. Borrowers typically end up paying $1,200 in interest and fees for every $1,000 they borrow, making these loans a spectacularly bad deal.
13. Debt has been linked to depression
It’s not unusual to feel a bit blue when you stare down a pile of unpaid bills. Now, researchers have shown that debt really does have a negative effect on your mental health. Short-term debt, like what you owe on credit cards, is linked with an increase in symptoms of depression, a study conducted at the University of Wisconsin – Madison found. Long-term debt, like your mortgage, doesn’t seem to have the same negative effect, perhaps because people see it as an investment in their future.
14. Debt is a big obstacle to home ownership
Owning your own home may be a key part of the American dream, but debt is keeping some people from buying a house. Of the 6% of people who reported in a NerdWallet survey that they’d been turned down for a mortgage, more than half said high debt-to-income ratio was to blame. Another 39% said the problem was their credit history or credit score.
15. 12% of Americans expect to die in debt
Some people don’t see a way out of the tunnel of debt. Twelve percent of people Bankrate surveyed in 2016 said they didn’t think they’d ever pay off all they owed. Older people were significantly more likely than younger people to see debt as a lifelong problem.
The good news is that Americans are actually feeling more optimistic about their debt payoff prospects. In 2015, 21% said they expected to die in debt.