(Newswire.net — January 29, 2020) — Consumer debt levels in the United States have been rising steadily for many years. For 20 consecutive quarters, total consumer debt has risen; in 2019, it reached a new record of $13.86 trillion. The debt comes from many sources, including $9.4 trillion of home loans, $1.3 trillion of auto loans, $1.48 trillion of student loans, and $1.08 trillion of credit card debt.
Debt is generally problematic, restricting consumer spending and occasionally trapping consumers so they’re practically unable to build wealth. So why is it constantly increasing?
Basic Financial Literacy
Financial literacy isn’t commonplace. In the United States, there’s no requirement to take a financial literacy class in high school, nor is it especially common for parents to teach their kids about basic financial topics. Accordingly, many Americans don’t understand basic financial concepts, like the difference between a debit card vs credit card, or how compound interest works. They’re more likely to sign up for a credit card or a loan without fully understanding the consequences of such a decision, and don’t have the budgeting or financial planning skills necessary to consistently reduce their debts.
Credit Card Availability and the Bankruptcy Protection Act of 2005
It’s no secret that U.S. consumers love credit cards. The United States has a culture of immediate gratification and one of materialism; accordingly, people feel a rush when they make big purchases, and they’re inclined to buy the things they want right away, instead of waiting until they can afford them.
Obviously, this isn’t true of all consumers with credit card debt. Many use credit cards to pay their bills, relieving the financial pressure they might otherwise face, rather than for indulgence. The number of people engaging in this practice has increased since the passing of the Bankruptcy Protection Act of 2005. This piece of legislation made it much harder for consumers to file for bankruptcy. With fewer options to settle their seemingly impossibly high debts, consumers started turning to credit cards.
The End of the Recession
It might seem like the Great Recession had nothing but negative economic consequences for consumers, but there were a few “silver lining” effects. One of these was a sharp decline in consumer debt, including credit card debt. In the first three months of 2009, consumer debt decreased by 10 percent each month. This is because banks made it much harder to get a loan or a credit card; the entire industry started to tighten.
It didn’t take long for the effects of the recession to begin to decline, however. In the wake of the economic recovery, banks eased up on these restrictions, gradually making it easier for consumers to take on debt. When credit and loans are easier to obtain, people are inclined to take advantage of them.
This effect is especially pronounced in the auto industry. Lending institutions have been sharply lowering their credit standards for issuing auto loans, resulting in a massive increase in auto-related debt. People with low credit scores and minimal credit history have been qualifying for significant loans; as a result, some analysts have suggested subprime auto loans may be forming an economic bubble.
Medical Expenses
It’s also worth noting that a significant chunk of consumer debt is at least partially due to medical expenses. More than two-thirds of all bankruptcy filings state that medical bills or illness-related issues related to their financial downfall. This is no coincidence. Medical costs in the United States are borderline exorbitant, and if you don’t have insurance or a payment plan, it can cripple your finances. The only options may be paying your bills with credit cards, or refinancing your home.
Student Loans
Similarly, the cost of college education has increased every year for decades, and more students are attending university. To make matters worse, many new college students don’t fully understand what they’re signing up for, and may take on debt without comprehending the payments they’ll have to make in the future. The average student loan debt per person is now $31,172, which can take years to fully pay off.
Homeownership (and Good Debt)
Not all consumer debt is inherently bad. Homeownership rates remain high, and in most cases, mortgages can be considered a “good” form of debt; they carry a relatively low interest rate, and enable consumers to make an important purchase they may otherwise be completely unable to make. Since home loans make up more than two-thirds of all consumer debt, we shouldn’t be too worried about the $13.86 trillion figure.
Consumer debt is a complicated topic, but it’s clear why consumer debt in the U.S. is increasing. A variety of factors, including high medical costs, high tuition rates, and most importantly, readily available credit and debt, have come together to raise total debt.