For the past several decades, consumer debt in the United States has consistently grown, with only slight and temporary exceptions. For 20 quarters in a row, we’ve seen increases in total consumer debt, reaching a total of $13.86 trillion in 2019.
This debt can be traced to a number of different sources, some of which are more understandable than others. For example, $9.4 trillion of this debt, or more than two-thirds of the total debt, comes from mortgages. Another $1.3 trillion comes from auto loans, with $1.48 trillion in student loans, and a surprisingly low $1.08 trillion of credit card debt.
Debt, of course, isn’t always a bad thing. When used properly, it can be a way to help consumers buy important things they might not otherwise be able to afford, like a home or an education. But in many cases, debt can have devastating economic effects; it often traps consumers in problematic situations, forcing them to make regular payments, and letting their debt spiral out of control because of compound interest.
So why is consumer debt such a problem, and what can we do about it?
Consumer Culture and Credit Cards
One of the biggest factors for the consumer debt crisis is consumer culture in general. Americans tend to be driven by materialism, and sometimes, greed. We’re incentivized and encouraged to buy as much as possible, pushing the limits of our budgets in order to keep up appearances or indulge our desires. We often buy bigger houses than we need in order to make an impression on others, or upgrade our gadgets with the latest and greatest technologies—even when our older devices work just fine.
This problem is compounded by the availability and widespread use of credit cards, which often carry high interest rates. If we don’t have enough money in our bank account, we can buy something with a credit card—even though it puts us in debt, sometimes deeply. Signing up for a debit card online can help you control this habit and stay within the limits of your checking account, but this requires more discipline—which not everyone can muster.
Lack of Rudimentary Financial Literacy
It’s also worth noting that we have a problem with financial literacy in the United States. It’s hard to measure financial literacy with any kind of precision, but only a third of young people can currently pass a basic financial literacy quiz that covers topics like interest rates, inflation, bond prices, financial risk, and mortgages. If people don’t understand how compound interest works, or if they don’t understand the full consequences of going into debt, they’re going to be much more likely to make bad decisions.
It doesn’t help that loans are incredibly easy to attain in the United States, no matter what you need or what your credit history is like. Interest rates are near all-time lows, and it’s possible to get a loan for a home, a car, or an education with little to no background checks. Accordingly, people are going into debt to buy things they can’t afford, without thinking through the consequences of future payments.
The Student Loan Crisis
It’s also worth noting the prevalence of student debt in consumer debt figures. More than two-thirds of college students take out student loans, and the average graduate leaves college with nearly $30,000 in debt. This is driven by a crippling combination of factors; the price of college education keeps rising, while we pressure every young person in the United States to go to college no matter what.
So what are the solutions?
·Better financial education. Most of the problems related to consumer debt would disappear if people had a better understanding of how personal finance works. Personal finance courses in high school, or even earlier, could be a massive help in bringing our financial literacy up to respectable levels.
·Better paths to debt elimination. For people who are in debt, there need to be better paths to potential recovery. Bankruptcy is a complex, last-ditch effort to relieve debt; it shouldn’t be the only viable option to recover from poor past decisions.
· Tighter lending requirements. It would also help if banks and lending institutions imposed stricter requirements on borrowers, practically forcing them to stay within their financial means rather than overextending themselves.
It’s unlikely that the American consumer debt problem is going to disappear anytime soon, especially if our materialism and access to loans remain the same or continue growing. However, if we invest in the right areas, including better financial education for young people and more available routes to eliminating debt, we could be able to make a positive impact.