It may sound like a bad monster movie title, but the return on consumer debt is a growing concern.
A recent New York Times article details the rise in consumer debt, which has reached a new high and now surpasses the record of $ 12.68 trillion of consumer debt that we collectively had in 2008. In 2017, after a strong drop followed by a rise as consumer confidence improved, we hit a new high of $ 12.73 trillion.
One trillion is a large number. Numbers measured in trillions (that’s 1,000 trillion, or 1,000,000 million, yes, that’s correct!) Can seem abstract and difficult to relate to in our own individual situations.
While large numbers can be difficult to understand, dates are easy. 2008 is when the economy collapsed, due in part to an uncontrollable amount of debt.
Good debt and bad debt
Mortgage debt still makes up the majority of consumer debt, currently 68% of the total. [Ii] But student loans are a growing category, currently more than doubling their share of total consumer debt compared to 2008 figures. [Iii] Coupled with a healthier economy, these new debt levels of Consumers may not be of much of a concern yet, but the impact of debt on individual households is often more palpable than the general view of economists. Debt has a way of creeping into families.
It is common to hear references to “good debt”, usually when talking about real estate loans. In most cases, the interest on the mortgage is tax deductible, which helps lower the effective interest rate. However, if a home has too much debt, none of it feels like good debt. In fact, some people spend their home ownership entirely, investing their surplus income and living in more affordable rented apartments, rather than shouldering the fluctuating cost of a home and their seemingly endless mortgage payments.
Credit card debt
Assuming that a mortgage and car loan are necessary evils for your home to work, and that student loans can pay dividends in the form of greater earning power, credit card debt deserves a closer look. The average American household has more than $ 15,000 in credit card debt, [iv] more than a quarter of the median household income. The average interest rate for credit cards varies by card type (rewards cards can be higher). But overall, American households are paying an average of 14.87% APR for the privilege of borrowing money to spend.
That level of debt requires a hefty payment every month. Guess what the monthly credit card interest would be on $ 15,000 credit card debt at an interest rate of 15%? $ 187.50! (That number will decrease as the balance decreases.) However, if your monthly payment is on the low end, your debt will not go down very quickly. In fact, at $ 200 per month paid on credit cards, the average household would pay off that credit card debt for almost 19 years, with a total interest cost of almost $ 30,000, all with a beginning balance of $ 15,000! (Hint: You can find financial calculators online to help you determine how much it really costs to borrow money.)
You may not have trillions of debt (even though it may seem like it), but the first step to managing your debt is often understanding what its long-term effects could be on your family’s financial health. Formulating a strategy to cope with and maintain debt is the key to beating your personal debt monsters.