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What Is Consumer Debt?
Debt weighs heavily on the minds and wallets of people across the country. The average American has racked up $104,215 of debt across mortgages, auto loans, student loans and credit cards.
Mortgages make up the majority of this debt. HELOCs and auto loans take the second and third spots. While credit card debt ranks in fourth place, it still majorly impacts consumers. The typical American has swiped their way to $6,501 in credit card debt on average.
How did all these people get here — and how do they get out?
If you’re a good credit card user, you already know how payment history, credit utilization and the length of your credit history affect your credit score.
But millions of Americans overlook these easy tips that could help them manage credit card debt even more wisely.
Read more to boost your credit knowledge and keep your credit score in check.
Consumer debt is broken down into two main categories: revolving and installment debt. Let’s take a closer look at these categories, their definitions and examples of each.
The revolving side of consumer debt involves someone having a credit agreement with a lender that sets a credit limit. Many people see this as how much you can spend. However, it’s more like how much you can borrow within a certain period of time. So, if the credit limit on your shiny new credit card is $5,800 a month, that’s how much you can borrow. Then you pay it back.
Some examples of revolving credit include:
These are all harmless — and even good to have — as long as you realize you can accrue debt quickly. This is especially true if your lender has higher interest rates. While a good credit score can help with this, the current average credit card interest rate is a whopping 27.62%.
Making the minimum payment sounds great, until the interest kicks in. The more often you do this, the quicker you’ll fall into debt, meaning it’s not a best practice for reducing debt. But if it’s all you can do, it’s still better than paying nothing.
For installment debt, an entity lends you a lump sum of money, which you repay over a set period of time. The installment includes part of the principal, or the original amount of money you borrowed, plus interest.
The following are common types of installment debt:
One of the most important things to understand is whether your installment debt has fixed or variable rates. This significantly impacts your payments. Fixed rates often are higher, but they don’t change. Variable rates are at the mercy of market conditions. So, you could start with a lower rate, then one day get hit with a much higher one.
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Wondering where medical debt falls among what is considered consumer debt? The answer is: It depends. If your medical debt has an assigned payment, then it’s installment debt. Otherwise, it doesn’t fall into either category. If you don’t pay the provider within a certain period of time and the debt goes to collections, that also means it ends up on your credit report and can affect your credit score. There are federal efforts in the works to change that, but in the meantime, you can check with your hospital or doctor’s office to see if they have the flexibility to offer a payment plan.
The total household debt in the United States is at $17.69 trillion, according to the Federal Reserve Bank of New York. Yes, that’s a trillion with a “T.”
Why do so many Americans go into debt? Everyone’s situation is different, but some common factors are:
If you’re dealing with consumer debt, there are some strategies you can take to reduce or eliminate it:
Credit counseling can help, too. Discover how a credit counselor can assist you in reducing your consumer debt.
Maybe you’re scrambling after your car broke down. Or you got a medical bill you weren’t expecting. Or inflation has finally pushed your budget over the edge. Take a breath. You don’t need to go it alone.
When money is tight, these resources can help you manage unexpected expenses without stress.
Ready to stop worrying about money?
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