Current US Consumer Debt
Revolving and Non-Revolving Debt
In November 2020, U.S. consumer debt rose at an annual rate of 4.4% to slightly below $4.2 trillion. That's after rising by 1.3% in October. Consumer debt had hit a record of over $4.2 trillion in February 2020, right before the pandemic and recession set in. Debt, along with consumer spending, had fallen dramatically in response to the COVID-19 pandemic, threatening the economic recovery.
Consumer debt has two components: revolving and non-revolving debt.
Revolving debt is mostly comprised of credit card debt. In November, it fell 1.0% to about $980 billion. This decrease follows a 6.7% decrease in October and a 30.8% plunge in the second quarter. Revolving debt consistently fell between March and August 2020, so November represents a continuation of the trend of declining revolving debt after its increase in September.
Revolving debt set a record of about $1.1 trillion in February 2020. That was higher than the previous record of over $1.0 trillion set in 2008. The difference was that revolving debt in February 2020 was only 26% of the total debt compared to almost 38% of the total debt in May 2008.
Non-revolving debt includes loans, mostly education and auto loans. In November, it increased by 6.1% to about $3.2 trillion. It had risen by 3.8% in October. Total student loan debt for October and November has not yet been made available; it totaled $1.7 trillion in September, while auto loans were at $1.2 trillion.
What Is Consumer Debt?
Consumer debt is what you owe, as opposed to what a business or the government owes. It's also called consumer credit. It can be borrowed from a bank, a credit union, and the federal government.
The consumer debt total is made up of revolving debt and non-revolving debt.
Credit card debt is revolving debt because it's meant to be paid off each month. Credit cards incur variable interest rates that are commonly pegged to LIBOR, though a different index may be used after 2021 when LIBOR is expected to be discontinued.
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.
Although home mortgages are also a type of loan, they aren't considered consumer debt. Instead, they are personal investments in residential real estate.
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 its record at that time of over $1.0 trillion in May 2008.
The recession curtailed revolving debt. It fell consistently from month to month in 2009. 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.
By May 2011, credit card debt had fallen to a low of $832.5 billion.
Auto loans have increased over time because of low interest rates. People took advantage of the Federal Reserve’s expansive monetary policy. The Fed lowered rates in 2008 to fight the recession, and did it again in 2020 to fight yet another recession caused by the COVID-19 pandemic. Auto loans are usually three to five years long. If the borrower fails to make payments, the bank may reclaim the underlying asset.
In 2010, the Affordable Care Act allowed the federal government to take over the student loan program. The federal government replaced Sallie Mae, the previous administrator. By eliminating the middle-man, the government 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 October 2020, non-revolving debt stood at about 76% of all consumer debt.
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 years. 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. That's because your education may allow you a better-paying job. That creates an upward cycle, boosting the economy even more. It allows you to furnish your home, pay for education, and get a car without having to save for them.
Drawbacks of Debt
Debt can be devastating. If the economy goes into recession, and you lose your job, you may go into default. 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 you face a medical emergency.
Board of Governors of the Federal Reserve System. "Consumer Credit G-19 - Current Release." Accessed Jan. 13, 2021.
Board of Governors of the Federal Reserve System. "Consumer Credit G-19 - Historical Data." Accessed Jan. 13, 2021.
Consumer Financial Protection Bureau. "You Might Have Heard That LIBOR Is Going Away. Here’s What You Need To Know About LIBOR and Adjustable-Rate Loans." Accessed Jan. 13, 2021.
Board of Governors of the Federal Reserve. "Policy Tools - Open Market Operations." Accessed Jan. 13, 2021.
Experian. "Why You Should Avoid Long-Term Auto Loans." Accessed Jan. 13, 2021.
Experian. "What Is the Difference Between Private and Federal Student Loans?" Accessed Jan. 13, 2021.