As of 2022, consumer debt tallied at $16.51 trillion, a dramatic increase from 2019’s $14.14 trillion. While some financial analysts might argue that these numbers are no cause for concern, most consumers maintain that the weight is a little too hefty to bear, and we cannot blame them for their wary approach toward best this year. With the year just kicking off, who knows what to expect of 2023’s finance system? As the cost of living soars, many people continue digging into consumer debt by the day. But how did we get here? To get to the root of this ballooning problem, we must go back to understanding consumer debt.
What Is Consumer Debt?
By definition, consumer debt refers to any loan used for personal consumption. Unlike their counterparts, these loans aren’t incurred for any business investment or government operations. Instead, they are acquired for individual and personal needs. Consumer debt can be categorized into two categories: secured and unsecured. Secured debt is loans backed by collateral (homes, cars), whereas unsecured debt refers to loans with no collateral (medical bills, credit card).
Common Types Of Consumer Debt
The United States has about 12 types of consumer debt, all of which amount to the $16.51 trillion owed to the Federal Reserve. We list five of these prevalent debts in descending order of their balances as of 2022.
- Mortgages
- Student loans
- Auto loans
- Credit cards
- Personal debt
- Short term high-interest loans
Note: Most of these are either revolving or non-revolving. Revolving debts are paid monthly with variable rates; however, non-revolving debts are paid upfront in lump sums over a defined term with fixed rates.
8 Driving Factors Behind Consumer Debt
One must grasp its reasons to understand the nature of consumer debt. So here goes the million-dollar question- what draws consumers into these types of debts? On a broader spectrum, we’d say circumstances; however, a significant percentage of consumer debt also stems from financial habits. With that, let’s take you through some of the leading reasons behind the alarming rates of consumer debts in the U.S. today.
1. Low Income
Low wages are admittedly the most significant consumer debt catalyst. With millions living paycheck to paycheck in this economy, sustaining a financially healthy life is nearly impossible. Between bills and responsibilities, this bracket of earners is hardly ever left with cash to spare for those rainy days, let alone investment. Living off their income grows strenuous and overwhelming, forcing them to turn to creditors for a helping hand.
2. Divorce
Divorce is synonymous with two things; halved income and split responsibilities. When a couple decides to get divorced, their financial situation drastically changes, not to mention their lives. For some, this transition comes with more financial weight, that is, residential moves, individual bills, child support, alimony, et cetera. For others, an annulment means adopting a new lifestyle, which almost always translates into financial adjustment. While some people cope and thrive in these changes, many struggle to keep up, pushing them to seek alternatives like debt.
3. Money Management
Poor money management is a core cause of consumer debt. Most adults have opened up about lacking the financial literacy and tools like YNAB app necessary to develop healthy money habits, the struggle often being budgeting, overstretching their finances, smart credit, and saving. All of these factors balled into one is a slippery slope for falling into consumer debt.
4. Unforeseen Expenses
Consumers face risks daily, and many are left in a financial pickle when these catastrophes strike. Think about it. From a boiler malfunction to a plumbing faulty, so much could go wrong, forcing you to reach into your pockets for a buffer. The problem comes in when the consumer doesn’t have an emergency fund set up to look out for them during these times- this is when some people reach for their credit cards to cover that unforeseen bill.
5. High Cost Of Living
The cost of living seems only to inflate housing and amenities costs by the day. Unfortunately, while the inflation rates soar, they’re imposed on a weakening economy with unemployed and low-wage citizens. It can be a real pinch for consumers who feel the odds are stacked against them, forcing most of them to lean on debt as a suboptimal finance source.
6. Unemployment
2020 saw many people lose their jobs; for many economists, this led to a consumer debt spiral. Some people affected by these cutoffs have yet to find a job to sustain their livelihood, whereas others are still struggling to pay off what they owe from this financial setback. Unemployment had consumers caught in a hard place, leaving them looking to credit as a solution. Similarly, some people are left out of work following accidents and illnesses, which pushes them to rely on credit cards and independent loan financiers to make ends meet.
7. Overspending
Spending too much is hands down the fastest way consumers get into consumer debt. In a culture of trends and easily accessible credit, many people are bound to spend on items they do not need or, worse, living beyond their means, a precarious slope to consumer debt.
Takeaway
In these troubling financial times, consumer debt remains an enormous crisis. Many still need help to balance out their finances through a weakening economy and rising inflation. Along with the slumping financial system is a society of uninformed consumers who need more financial literacy to budget and identify leaks in their lifestyle, further digging them into the consumer debt hole. Hopefully, this piece sheds light on the driving force behind consumer debt and equips readers with practical tools to help rid themselves of it.