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Published On: Fri, Dec 9th, 2016

Household Debt in the US is Growing to Alarming Levels

In a recent study conducted in the US on debt and how it is transferred through generations, it was discovered that 8 out of 10 citizens in the US are in debt. The debt could be from the student loan, mortgage or credit card debt. This state of affairs has severe implications to the citizens who need to keep borrowing in order to sustain their current living standards. It therefore means that the debt levels in the US are not going down anytime in the future; and individuals now have to look for alternative ways on how to get a loan with bad credit if their credit score deteriorates over time.

To put the figures into perspective, it is estimated that about 40 million US citizens have student loan debts that have accumulated to more than USD 1.2 trillion as of 2015. This means that on average each of the individuals with a student loan owes the government about USD 29,000.

Looking at the debt levels from a household perspective, it is estimate that each household in the US has an average of USD 15,675 in credit card debt while they carry an average of USD 132,158 in total debt. Each household is also estimated to carry an average of USD 48,591 in student loans and USD 27,865 in auto loans. The highest loan burden goes to households with mortgage loans who stand at an average of USD 172, 341 per household. In total, households in the US had a debt burden of about USD 12.29 trillion in 2015.

photo Alina Ku-Ku via Shutterstock

photo Alina Ku-Ku via Shutterstock

A research done by NerdWallet on American Household Debt in 2015 reveals that there is a growing trend in debt levels across the US and they went further to identify the reasons why the debt levels are growing. One of the leading causes of rising debt levels in the US is due to the fact that the rate at which the cost of living is growing is much higher than the rate at which income levels are growing across the country.

For instance, within the past 13 years since 2003, the median growth in household incomes has been about 26%. This is way low compared to the rate at which cost of living has hiked up within the same period of time. Medical costs went up by about 51% while the cost of food and beverages grew by about 37% within the same span. On average, overall cost of living went up by about 29% over the same period when the incomes grew by 26%. To fill in the 3% gap, individual and households are forced to borrow more money and get into more debt every other month.

The high debt levels across the country as reported by the consumers themselves are usually highly understated. Going by the credit card debt alone, in 2013 the lender reported credit card debt in the US was 155% more than what the borrowers themselves had reported. This implies that the cost of financing the debt could be higher than the estimated USD 6,658 per year. But even when working with these conservative figures, the interest payment per year for an average US household is about 9% of the estimated annual income of USD 75,591. With such high amount of money going into debt repayment, the situation is bound to be explosive if not well managed.

Faced with potential bankruptcy and blacklisting by the credit reference bureaus, individuals and households across the US have to device strategies of getting out of debt; or at least reducing their debt levels over time. Unfortunately, no short-cuts are available for the process of reducing your debt levels; one has to start by cutting down their costs. Living within one’s means and prioritizing debt repayment before luxury expenditure will help you start making small strides out debt. The process will be painful initially but with a clear focus of wanting to walk into financial freedom, the elimination of unnecessary expenses from your monthly budget will ultimately pay off when you clear your debts and start saving for investment purposes.

No one shoe fits all people though. Different households will need to choose different strategies of getting out of or reducing debt; and the time taken before you can be fully out of debt will also differ based on the amount of debt and your monthly repayment installments.

Author: Lolita Di

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