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Average American Debt: In Over Our Heads

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Living with debt has become perfectly normal. Payments are customary parts of our budgets and the reality of owing money is simply part of life. Thanks to the invention of student loans, we could say that the first clear sign of adulthood comes when we have to start making payments on our college loans.

And that’s just the beginning. We quickly acquire credit card debts, mortgage debts, car loans, and other expenses that bite off huge chunks of our budgets. The average American debt is constantly rising.

How bad is it? Brace yourself. We’ve broken down the facts and trends along with some rather discouraging figures. 

  • How much do we pay for mortgages? What happens if we miss a payment? 
  • When do we get rid of student loan debt? 
  • Why are credit cards an expensive way of life in America?
  • Do we get smarter, wiser, and less indebted with age?
  • Is our country’s way of dealing with debts as careless as ours? Even worse?

Heaven help us.

Average Mortgage Debt

A real estate mortgage is the number one debt most Americans ever take on. Millions of people apply for mortgages to purchase homes.

Many measures of consumer indebtedness exclude mortgages. The idea is that taking on debt to buy a home is an investment, not a normal debt. There’s some validity to that point of view, but it doesn’t erase the fact that it’s money that we owe.

Outstanding mortgage debt in the USA reached 15.5 trillion dollars in the first quarter of 2019. (Source) That’s a lot of dollars.

On the bright side, renewed willingness to invest in a home is another sign that people feel the economy is improving.

Median Monthly Mortgage Payment

Before you decide to take on a mortgage debt, consider: According to official Census Bureau data from 2017, the median monthly mortgage payment amount is $1,100. (Source) If you don’t think you’ll be able to match that amount, maybe you should reconsider or postpone your mortgage ambitions.

Debt to Income Ratio for Mortgage

When you’re being considered for a mortgage loan, the focus isn’t on your income or the amount of debt you have. It is actually all about your debt to income ratio. In other words, it’s more important for lenders to know that you are successfully coping with your debt than how much debt you have in total.

The best way to make sure you qualify for a mortgage is to keep your DTI ratio as low as possible. Experts in the field suggest that you shouldn’t go over 30% but the deal-breaking point is 43%. Anything beyond that and you won’t be able to qualify for a loan at any mortgage rate. (Source)

What happens if you don’t pay on time?

If you’re late on a mortgage payment you’ll have to pay late fees. They can be anywhere from 3% to 6% depending on your lender’s policies and the state you live in. 

But that should be the least of your worries. Legally speaking, your vendor can declare you in default after just one missed payment. You could find yourself taking a trip to foreclosure.

In most cases, the lender will contact you. That’s your chance to negotiate a reasonable mortgage repayment plan. All you need to do is be accessible and responsive. If you ignore the lender you risk being sent to collections, a lawsuit, or repossession of your home. Bankruptcy is one way to protect yourself, but it severely damages your credit score. And you may have to give up your home anyway.

How to Deal with Mortgage Debt

Prevention is the best option. Make sure you include mortgage payments in your monthly budget so you don’t overspend. Mortgage is a secured debt, meaning you will lose your home if you don’t pay, so consider it a priority over other debts you might have.

If you’re already behind on your payments or believe that you will be, here’s what you can do:

  • The first thing you should do is contact your bank or non-bank mortgage lender. In most cases, they will be willing to hear you out, offering a grace period or another repayment plan. If you choose to ignore the lender’s calls, they will be forced to take legal actions.
  • Depending on the lender, you might get different options to help you out during a rough patch. For example, you might be offered payment extensions or a so-called payment holiday where you stop paying the mortgage for a few months.
  • You might also get an interest-only payment plan where you hold off on the capital portion of your payments for a few months. It gives you a chance to get yourself together.

Student Loan Debt

What is the price of a good education? Unfortunately, many Americans have to ask themselves that question as soon as they graduate and face the unpleasant figure on the bill.

According to statistics, an average student is left with a $40,000 student loan debt after college. (Source) If we assume average payments of $400 per month and the current interest rate of 4.53% for federal student loans, we can conclude that it takes students about 10 1/2 years to become debt-free. A student who spends four years studying at college must spend more than 2 1/2 times that long paying off the debt.

The Rising Debt

While more and more people attend college to get better jobs and a brighter future, they also contribute to more college debt in America. In the past 20 years, there’s been a 500% increase in debt, reaching $1.56 trillion. (Source) With further advances in technology and an increased need for educated workers, this number will surely rise in the years to come. 

Who Has the Most Debt?

The average US debt of $40,000 per student doesn’t really show us the struggles certain graduates have to deal with. For example, a 2018 study has shown that the dental college graduates owe an average of $285,184 in their student loans. (Source) Around 40% of these graduates even went over $300,000 in debt. Although their earnings after college usually manage to cover that amount, it’s still a dangerous game they’re playing.

Medical students are far from shy when it comes to taking out student loans. The median debt for medical graduates last year was an amazing $194,000. (Source) This crippling debt stays with more than 70% of graduates and significantly affects their quality of life.

Advice on US Student Loan Debt

The problem Americans have with debt starts at a young age. That is why it’s important to understand some basic finance early on. Student loan debt is a good place to start. If you plan to rely on student loans to get through college, keep these realities in mind:

  • You’re not getting anything for free. It’s a loan, and sooner or later you will have to return every last penny.
  • There are student loan interest rates at play here, which can vary. Graduates deal with rates of about 6.6%, while parents pay 7.6%. (Source)
  • Don’t borrow too much. Experts advise that you consider the anticipated annual pay of your first job and use it as a measuring point. If you’re going to be earning $50,000 a year, your student loan shouldn’t go over this amount.

Credit Card Debt

The discrepancy between average household income and average expenses in the USA has forced many Americans to turn to credit cards for a way out. Of course, postponing one’s financial obligations doesn’t solve anything in the long run. More than half of people in the USA who have credit cards also have outstanding debts they just can’t deal with. The main problem here is that people don’t really understand the consequences of this average American debt.

How Much Are We in Credit Card Debt?

Statistics from March 2019 show that American households have an average credit card debt of $8,390. (Source) This is a 3% increase from the first quarter of last year and it follows an upward trend that has been in effect since 2011. Obviously, the highest expenditures are found in the winter when the holidays kick in, so chances are we’ll see record-breaking numbers by the end of the year.

The magnitude of the problem is shocking. In last year’s final quarter, total US credit card debt exceeded one trillion dollars. (Source) The figure is growing and the growth shows no sign of slowing.

What You Can Do About It

Credit card debt is a serious problem that can easily consume your budget if you’re not careful. There are some measures you can take to make sure your cc debt doesn’t get out of hand, but they all come down to following some basic rules of financial literacy.

Limit your credit card use

If you’re already struggling with credit card debt, don’t make it worse. The average American consumer has four credit cards. (Source) Your outstanding credit card debt should tell you that maybe it’s time to part with one or two.

Use cash when possible

The best thing about cash is that it gives you a more realistic picture of your finances. On the most basic level – you can’t spend money you don’t have. Carrying copious amounts of money is never a good idea but if you have the option to choose, opt for paper.

Pay your debts based on urgency and rates

If you have a number of different debts to take care of, create a payment plan based on the interest rates and late fees.

Set up a separate debt fund

Nearly 7.5 million people in the USA have IRA savings plans that can be used as both a retirement fund and an emergency fund for dealing with a debt of average American size. (Source) If you’re constantly struggling with debts, it might be a great idea to dedicate one savings account solely to dealing with such problems.

What Happens If You Can’t Pay Your Credit Card Debt?

Most people will tell you that they’ve missed a payment or two at some point in their lives, and many of them don’t consider it a problem. However, even one missed payment can have consequences.

First of all, there is the question of the late payment fee that you must pay if you’re just one day past the due date. It may not be much, but miss your payment a couple more times and you’ll see how the fees add up.

Another thing you lose with missed payments is your attractive APR rate. You could get socked with a penalty APR as high as 30%. Finally, even a single payment can significantly affect your credit rating, especially if you have a bad score already.

With three missed payments, you risk your credit card account being closed. Anything beyond that will put you at risk of your debt being sold to a debt collection agency. You could end up getting sued.

Average American Debt by Age

(Source, Source)

Throughout their lives, Americans struggle with debt in various forms. Their introduction to debt may be a student loan. Credit cards as a way of life appear next, followed by mortgage and car loans. As the years go by, these debts accumulate and prevent people from saving for retirement. Here is a breakdown of average US debts:

“Student Years” (Age range: 18-24) – $22,000

We’re talking Generation Z and millennials. These Americans are in the process of getting a higher education with student loan payments just over the horizon. Most are unaware of the financial struggle that awaits them or the fact that they’re already in debt. The average debt in America for these youngsters is already $22,000.

While the largest part of their debt (28%) comes from student loans, younger generations also have to deal with credit card debt. This is why it’s important to introduce financial literacy early in life. Young people need to learn how to manage their funds before they go in too deep. 

“First Job” (Age range: 25-34) – $42,000

This age group mainly consists of millennials in their prime – young people who have finished school and are ready to accept adulthood responsibilities. This, of course, means paying the bills and debts that are starting to become a noticeable concern. They are the ones who are starting to feel the pressure of American personal debt coming from all sides.

Besides credit cards, older millennials also have to deal with student loan debt. Some have mortgages. Considering most of them are at their first, low-paying jobs, they are unable to repay debts that amount to $42,000 on average.

“Family Life” (Age range: 35-49) – $39,000

The most affordable way to buy a home in the USA is through mortgage loans. It is said that 63% of Americans have them and they are the main focus of the Generation X age group. At this point in their lives, people have an average US household debt of $39,000 whose primary source are mortgages. However, besides mortgages, Generation-Xers also have to worry about the credit card debt that comes close second, as well as car and student loans that come up third. 

Experts say that you should strive towards being debt free by the time you reach 45. That’s when you should shift your focus to retirement. If most of your money goes to service debts, you’re going to spend rather unpleasant final years.

“Nearing Retirement” (Age range: 50+) – $36,000

It sounds distressing that 14% of Baby Boomers have zero dollars saved for retirement, but that’s the truth. (Source) Evidently they were never told that they should try to clear their average debt per person in America by the time they reach this age. With over 50 years of life gone, Baby Boomers still have an average debt of $36,000. Their largest debt source: mortgages. Credit card debts and car loans are factors too.

Because of the fact that they are still in debt and haven’t saved as much as they should have, most Baby Boomers expect to work past the traditional retirement age of 65 to get additional income. (Source

US National Debt

(Source)

Of course, it’s not just America’s population that is in debt – the whole country is. According to the most recent Treasury data, the national debt average has reached an all-time high with $22 trillion. The debt increased by $2 trillion since 2017 when Donald Trump became the president.

In the upcoming decade, it is estimated that the average annual deficit will be $1.2 trillion. The Congressional Budget Office reports that this national deficit is the highest it has been since the post-recession period in 2008. Their estimates say that by 2029, the national debt will be 93% of GDP, continuing the ever-increasing trend.

Who Does America Owe Money to?

(Source)

While 73% of the national debt in the US is public debt owed to various countries, 27% of it is intragovernmental – that is, borrowed from 280 different federal agencies. 

Public Debt

The largest foreign owner of US public debt is China, with $1.11 trillion. Second place goes to Japan with $1.06 trillion. Holding US debt is beneficial for both of these countries, not simply because it’s a leverage over one of the most powerful countries in the world, but it also keeps the value of the dollar higher, which yields better export prices.

Intergovernmental Debt

Federal agencies sometimes come up with a surplus, which they invest in the country through Treasury notes, thus becoming national money lenders. Because one of the biggest lenders is the Social Security Trust Fund with $2.798 trillion, the owner of the average American debt in 2019 is effectively the average tax-paying American – you. Hopefully, this makes you feel a little better about your own debt.

Q&A

How much in debt is the average American?

Statistics from 2018 show that the average American carries around debt of more than $38,000. This is about a $1,000 increase from the year before, and it doesn’t include mortgages. (Source)

How much credit card debt does the average American carry today?

The latest stats from Q1 2019 show that an average household debt in America is $8,390. If we compare this number to the debt from the first quarter of the year before, we’ll notice that it’s a 3% increase. As a rule, the figures increase in the final quarter, during the holiday season, so we can expect even higher results.

How much debt is normal?

The best way to determine if you’re in too much trouble with debt is through the DTI ratio. This percentage shows your coping mechanism for the average American debt and it’s often used for mortgage assessment. If you’re keeping the ratio under 30%, you’re doing great.

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