The Looming Crisis of American Household Debt
Updated : July 26th, 2022
Consumer debt reached a whopping all time high record of $15.84 trillion in the first quarter of 2022, climbing 1.7%. The most significant portion of this debt – $11.18 trillion, to be exact – is mortgage debt, which climbed 10% during the first quarter. But other types of consumer debt are slices of the proverbial debt pie, including student loans, auto loans, and credit card debt.
Financial pundits looking back at the Global Financial Crisis of 2007 are sounding alarm bells that consumer debt may significantly contribute to a serious financial crisis.
It’s now a combination of higher prices and higher rates.
Credit card debt is at an all time high, 9% higher than it was one year ago – and Americans are opening a record number of credit cards. In fact, during the first two months of 2022, they opened up around 11.5 million credit cards, a more than 31% increase from last year.
The average monthly car payment has now also hit an all time high, coming in at a whopping $700 per month. Part of the problem here is that the average sticker price of a new vehicle rose above $48,000, an increase of 13% from a year ago. “It’s now a combination of higher prices and higher rates,” says economist Jonathan Smoke of the Kelley Blue Book. His words are an apt description, not only of the automobile industry but of the economy in general.
You don’t have to be an economist to see the impact of higher prices at work. Food and beverage is up 10% in the last 12 months. Electricity is up 19%. And gas is up a whopping 59.9%. Consumers are caught between a rock in a hard place. Some have chosen to chip away at household savings, whether those or savings they accumulated already or savings for the future. Around 48% of polled consumers said that rising prices have impacted their family, while 40% said they can no longer afford to put money into savings.
During the height of the Covid pandemic, some American consumers were showered with free money – but as they say, nothing in life is truly free. Stimulus checks of $600 per person were directly deposited in bank accounts. People laid off from work could collect unemployment benefits and gain federal benefits to boot. This created a situation in the workforce where some consumers were better off not working and just collecting benefits.
But now the free lunch is gone, and the bill is here… because lunch wasn’t really free. Prices of everything from eggs to electricity have gone up (way, way up) and consumers are needing to rely on credit to bridge the gap. Sometimes the gap is too large to bridge, and credit card delinquencies are starting to rise. Americans who were able to put those stimmy checks into savings are having to dip in. In some cases, this may be because credit cards have limits. But none of this is sustainable. Something has to give.
Credit card interest rates are basically the highest they’ve ever been.
Another piece to the puzzle is that the Federal Reserve has decided to combat inflation by raising interest rates. But that doesn’t bode well for credit card users, because this will push the APR of their revolving debt higher as well. In fact, credit card interest rates have climbed to an average of 20%, their highest ever, up from an average rate of 14.78% just before the pandemic in 2019. One leading analyst over at LendingTree.com has said “credit card interest rates are basically the highest they’ve ever been.”
Some pundits are speculating that international geopolitical events like Russia’s invasion of Ukraine are not to blame. But the Federal Reserve has attempted to spur the U.S. economy into recovery through a combination of stimulus and debt – which ultimately turns out to be a vicious cycle of printing more money, creating rampant inflation, and forcing consumers into debt in order to cover their expenses.
As you can see, the buck has to stop somewhere. Nobody is exactly sure where it’s going to stop, though. An economy built on household debt may present a looming crisis like the one homeowners saw in 2007 and 2008. But you don’t have to get caught in the trap. Learn more about what type is available through government programs and debt consolidation services, or speak with an attorney about strategic bankruptcy options so you can make a fresh start.
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