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Debt. Most of us have got it, and most of us don’t want to talk about it. But as someone who recently got out of debt (for now at least; I’m hoping a mortgage is in my future!), I’ve found that talking about it helps, if only to discover you’re not the only one with creditors to pay.
Per recent research from The Ascent, total consumer debt in the United States equals $16.5 trillion dollars. This is a record high, according to the New York Fed’s quarterly Household Debt and Credit Survey. Why is this figure so high? After the economic doldrums of 2020 and the early days of the COVID-19 pandemic, the economy has come back bigger and better than ever.
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But it has brought supply chain issues and inflation with it. As a result, more Americans have had to resort to paying for the expenses of daily living with personal loans, credit cards, and other forms of borrowing. How does that scary $16.5 trillion figure break down for the average American? And if you’re struggling with debt, what can you do about it?
What’s the average American household debt?
The average American household has $96,371 worth of debt, per credit bureau Experian. According to the Bureau of Labor Statistics, the median weekly income for full-time workers as of the third quarter of 2022 was $1,070, or $55,640 for 52 weeks in a year. This is the median, which is not the same as an average figure, but it gives us a rough starting place to see that many American households owe more money than they make in a year. And the St. Louis Federal Reserve found that households paid 9.5% of their income to their debts in the first quarter of 2022.
All of these big total numbers are kind of scary to contemplate, but it’s important to note a majority of that $16.5 trillion is in the form of mortgage debt, at $11.39 trillion, and auto loan debt represents $1.5 trillion. The more worrisome figure is the $890 billion Americans owe in credit card debt.
What’s wrong with credit card debt?
Credit card debt is insidious. While compound interest can work in your favor when it comes to investing, it does terrible things to the credit card balance you may be carrying. Most credit cards compound interest daily, and that interest you owe is added on top of your balance. So every day you carry a credit card balance, the cost of paying it off just keeps going up.
I will here point out that if you are indeed only paying 9.5% of your income to your debts, you’re likely in pretty good shape. It’s recommended you keep your debt-to-income ratio (DTI) at 36% or below, especially if you’re hoping to qualify for a mortgage, which is likely the largest sum of money the average person will borrow.
How can you lower your DTI?
There are two ways to lower your DTI: you can pay down your debts or you can increase your income. If you can manage both, that would be ideal. There are a few ways to make paying off your debt more manageable. You can look into applying for a debt consolidation loan, which pays off your different debts and gives you just one monthly payment to worry about. You could also consider a home equity loan if you own your home.
It definitely pays to get out from under credit card debt sooner rather than later, as with the Federal Reserve’s interest rate hikes, it’s becoming more expensive. You can raise your income through seeking out a pay increase at work, finding a new job, or even adding a side hustle. Using a side hustle to get out of debt and put aside extra money may mean giving up some of your free time, but it might be worth it.
Being in debt can be scary, and if your DTI is less favorable than the average American’s, you might feel ashamed of that. But you’re in good company, and with some hard work and the right tools at hand, you can lower your DTI and improve your financial life.
The Ascent’s best personal loans for 2022
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