Current US Consumer Debt

Revolving and Non-Revolving Debt

Woman holding credit card while shopping online on laptop while sitting at home
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Consumer debt hit a quarterly record of over $4.31 trillion in the second quarter of 2021. In July 2021, U.S. consumer debt increased at an annual rate of 4.7% to more than $4.33 trillion. Debt, along with consumer spending, fell in response to the COVID-19 pandemic, threatening the economic recovery, but it has bounced back to above pre-pandemic numbers.

Find out more about consumer debt in the U.S. and why it is at such a high level.

What Is Consumer Debt?

Consumer debt is how much money the citizens of the U.S. owe on loans, credit cards, or other credit instruments. It does not count debts from businesses or the government. It's also called consumer credit. You can borrow it from a bank, a credit union, and the federal government.  It has two components: revolving and non-revolving debt.

Revolving debt set a record of about $1.1 trillion in February of 2020. That was higher than the previous record of $1.0 trillion set in 2008. Revolving debt in February 2020 was close to 26% of the total debt compared to almost 38% of the total debt in May 2008.

Credit card debt is revolving debt because it's meant to be paid off each month. Credit cards incur variable interest rates based on the prime rate banks charge their most creditworthy customers. The prime rate varies, so the interest rates of cards vary.

Revolving debt is mostly comprised of credit card debt. In July, it increased 6.7% to $998.4 billion. This increase follows a 22.3% increase in June, and a 10.9% in the second quarter.

The Federal Reserve has reported on consumer debt each month since January 1943.

Non-revolving debt includes mostly student and auto loans. In July, it increased by 4.1% to over $3.33 trillion. It had risen by 7.2% in June. The latest data available from the second quarter indicate that total student loan debt is $1.7 trillion, while total auto loans were $1.3 trillion.

Non-revolving debt isn't paid off each month. Instead, these loans are usually held for the life of the underlying asset. Borrowers can choose between loans with either fixed interest rates or variable rates. Most non-revolving debt is made up of auto loans or student loans.

Why Are Americans in So Much Debt? 

Despite recent downward trends, Americans still hold a lot of debt that can be attributed to three things: credit card debt, auto loans, and student loans.

Credit Card Debt

Credit card debt rose due to the Bankruptcy Protection Act of 2005. The Act made it harder for people to file for bankruptcy. As a result, they turned to credit cards in a desperate attempt to pay their bills. Credit card debt reached a record of $1.0 trillion in May 2008, dropped to $832.5 billion in May 2011, then rose to $1.0 trillion again in October 2017. Revolving debt hit the current record of $1.1 trillion in February 2020.

Although home mortgages are also a type of loan, they aren't considered consumer debt. Instead, they are personal investments in residential real estate.

The recession curtailed revolving debt. It fell consistently from month to month from 2009 to May 2011. During the recession, banks cut back on consumer lending. Then the Dodd-Frank Wall Street Reform Act increased regulations over credit cards. It also created the Consumer Financial Protection Agency to enforce those regulations. In addition, banks tightened credit standards.

Auto Loans

The number of auto loans has increased over time because of the low interest rates imposed by the Federal Reserve's expansionary monetary policy. By lowering interest rates, the Fed attempts to boost the economy by encouraging borrowing and spending.

The Fed lowered rates in 2008 to fight the recession and did it again in 2020 and 2021 to fight yet another recession caused by the COVID-19 pandemic. The low rates made it attractive for consumers to take out auto loans.

Student Loans

Rising student loan debt has been one of the most discussed types of debt in the last decade. In 2010, the Affordable Care Act allowed the federal government to take over the federal student loan program instead of using a middleman to administer the programs. This cut costs and increased the availability of education assistance.

It helped boost non-revolving debt from about 62% of all consumer debt in May 2008 to about 74% in February 2020. In July 2021, non-revolving debt ($3.3 trillion) stood at about 77% of all consumer debt ($4.3 trillion).

Student loans increased after the 2008 recession as the unemployed sought to improve their skills.

Student loans are often for 10 years, but some are as long as 25. Unlike an auto loan, there is no asset for the bank to use as collateral. For that reason, the federal government guarantees school loans. That allows banks to offer low interest rates to encourage higher education. The government encourages it because the country benefits from a skilled workforce. It reduces the nation's income inequality and creates a healthy economy.

How Consumer Debt Benefits the Economy

Consumer debt contributes to economic growth. As long as the economy grows, you can pay off this debt more quickly in the future. You go into debt for your education, which allows you to get a better-paying job. The job helps you pay for that education, furnish your home better, or get a car without having to save for it.

When consumers take out debt, they are spending. Consumer spending is good for businesses because it means they can make profits. Profits can be shared with investors or reinvested into businesses to help them grow, which is also good for the economy.

Interest rates on debt are one of the Fed's economic control mechanisms that help to keep the economy from growing or shrinking too quickly. When debt is controlled, it can be healthy for an economy.

Drawbacks of Debt

However, too much debt can be devastating. If the economy tumbles into a recession and you lose your job, you may default on your debt. That can ruin your credit score and the ability to take out loans in the future. Even if the economy remains robust, you can still take on too much debt. It's not just because of so-called poor spending habits. It could be the result of unexpected medical bills and other needs. 

The best way to avoid credit card debt is to pay it off each month. In addition, build an emergency fund with three to six months' worth of your expenses to ensure you always have enough money to cover your bills and other monthly needs. It'll help you if a recession hits, you lose your job, or face a medical emergency.