A new report from personal finance website WalletHub reveals that U.S. households collectively owe around $17 trillion in total debt. The average family holds about $142,680 in debt, according to the report. This represents a sharp increase in household debt, with Americans owing roughly $320 billion more in total debt at the end of 2022 than they did at the start of the year.
The rise in household debt is mostly due to inflation and a rise in mortgage debt, which is based on strong consumer demand, according to WalletHub analyst Jill Gonzalez. Credit card debt is also a factor, though it was not included in the report. In the fourth quarter of 2022 alone, consumers added at least $398 million in new debt, the fourth-highest build-up for a fourth quarter over the past two decades and more than four times larger than Q4 2021.
Despite these alarming figures, Gonzalez stresses that it is not yet time to panic. According to WalletHub's estimates, household debt is still about $1 trillion below the breaking point. This is a projection made based on debt levels during the Great Recession. However, on a household level, the debt is less than $12,000 below the projected breaking point for household finances, and this could spell trouble for families across the country.
Having too much debt can send households into a downward spiral of late or missed payments, lower credit scores, and even foreclosures or bankruptcies if the situation gets out of control. With mortgage debt increasing by $290 billion in 2022, or by the second-highest annual jump since the end of the Great Recession, it is no surprise that this area stands as the one where the most debt is now owed. About 70% of the debt is made up of mortgage debt, which makes sense, considering a home is the largest purchase most people make during their lifetime.
All the latest data comes just days after the New York Federal Reserve detailed that over the last 90 days of 2022, credit card balances ballooned by $61 million to $986 billion overall, easily smashing the previous high of $927 billion, registered before the COVID-19 pandemic commenced. The rise in credit card usage and larger balances is raising eyebrows in light of interest rates being as high as they are. Earlier this month, Bankrate.com reported the average credit card APR, or annual percentage rate, set a new record high of 19.14%, eclipsing the July 1991 rate of 19%.
One potential explanation for this rise in credit card usage could be the availability of new credit cards and higher credit limits, leading to increased spending. The convenience of online shopping and contactless payments may also be contributing factors. However, with interest rates at record highs, it is crucial for households to keep their credit card balances in check and avoid carrying high balances, which can quickly spiral out of control.
Overall, the rise in household debt should serve as a reminder for households to manage their finances carefully and avoid taking on too much debt. While borrowing can be a useful tool for achieving financial goals, such as buying a home or financing education, it is important to be mindful of the risks involved and to borrow only what can be realistically repaid. With interest rates at record highs, households should be especially cautious when taking on new debt and aim to pay off existing debts as quickly as possible.
In conclusion, the rise in household debt is a cause for concern, with Americans collectively owing around $17 trillion in total debt. While it is not yet time to panic, households should be mindful of the risks involved in taking on too much debt, including missed payments, lower credit scores, and even foreclosures or bankruptcies. With mortgage debt and credit card debt on the rise, it is crucial for households to manage their finances carefully and avoid taking on too much debt. By budgeting wisely, paying off debts as quickly as possible, and seeking professional financial advice when needed, households can avoid the pitfalls of excessive debt and build a solid financial future.
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