Types Of Debt

A family sitting in front of their house
Managing & Paying Down Debt
Part 1 American Debt – An Overview
Part 2 Types Of Debt
Part 3 Debt Management – Doing It Yourself
Part 4 Debt Help – Getting The Assistance You Need

In this article about different types of debt in the US and debt culture, we’ll be looking at the following:

  • Household debt
  • Credit card debt
  • Why do people get into debt
  • Common causes of debt
  • Tips to help manage debt

Types of debt – Household debt

Among the most common types of debt, household debt is probably the most well known. When reports are published showing the average amount of household debt, many people do not understand exactly what this means.

Household debt is the combined amount of debt owed by everyone who lives in a household. It includes consumer debts like store card accounts, credit card balances, the mortgage on the house and any payday loans or automobile loans. When figures for household debt rise substantially it is an indication of an economic crisis. So, what is happening at the moment?

Credit card debt in the US

In August 2017 figures published showed that Americans have the highest amount of credit card debt in history. More than $1. 021 trillion is owed on revolving debt and this figure beats the previous record of $1.02 trillion that was outstanding in April, 2008 just before the financial crisis.

Over 40% of Americans spend  more money than they earn

The steady increase in debt is due to more customers having access to revolving credit with large banks and finance companies allowing consumers with a low credit score (sub prime) to have easy access to credit card accounts.

Although many consumers are happy with this situation, the rates of interest charged are high and there are fears that if interest rates rise even a small amount, for many families the debt might become unmanageable.

Young and older borrowers

More Americans are taking out loans to buy an automobile and the increase in student debt is also a worrying trend for economists who are predicting problems in the near future. The most concerning feature of this situation is that far more older people are racking up large amounts of debt. Some are taking out extra mortgages to help their children through college or to make a down payment on an apartment.

A group of students who are in debt

Others are struggling to make their pensions go far enough and whilst in the past most would have reduced on spending, many people now feel that they are owed a decent retirement even though they have not built up a sufficiently large pension pot to pay for it.

Why do people get into debt?

There are several reasons why people get into debt. In some instances debt can add up due to unforeseen circumstances that are out of your control. Maybe you have been ‘let go’ and have been unable to get another job. Or, a medical emergency that is not covered by insurance might make it essential to take out a loan.

In some cases, people may get into debt simply because they are not earning enough and when a lender offers money, even though the interest rate is high it is easy to be tempted to use credit without fully considering how it will be paid back.

Bad habits can cause debt

Spending money you simply do not have is a bad idea. But, this is not to say that anyone owing money is a bad person. Easy access to a credit card account and modern advertising are both factors that can cause debts to rack up for even the most sensible person. Add to that a lack of knowledge about how finance works and what the terms mean, it is easy to see how debt can soon add up.

Costs of buying on credit

If you buy an item and are not made aware of the total cost when you buy it on credit it can come as a shock when you look at the figures. Imagine that you pay $500 using a credit card. You want that lovely piece of furniture or the designer handbag and the monthly cost is only $15 which anyone can afford.

A man is shown paying off his credit card balance to avoid high interest rate charges

Suppose you take four years to pay off the credit card balance. At an interest rate of 14% (which is lower than most cards), it is going to cost you an extra $147. If the rate is higher, say 22%, the cost is going to come with interest added of $280 making the total cost $780.

Spending more than you earn

Most people go into debt by spending more than they earn. It is as simple as that. And, over 40% of Americans fit into this category. Living paycheck to paycheck and having no emergency savings makes it more likely that you will become mired in debt if you pay out more than you earn. However, even the most financially aware and savvy consumer can find themselves in debt when an unexpected emergency occurs. So, overspending is not the simple answer it appears to be.

Lenders make it easy to borrow

The whole world depends on consumer spending to create wealth and make economies stronger. Therefore, lenders are keen to allow even the most risky person to borrow money that is going to be used to buy stuff.

Most people go into debt by spending more than they earn. It is as simple as that.

Of course, they extract a high rate of interest for those with low credit ratings but they still make high profits by lending money. Borrowers who default are easily covered by those who pay, so lenders are not that unhappy when a customer goes into debt.

Some tips for managing debt

When you are in a bad financial situation there are some strategies than can be adopted to help you manage debt. Many families go through a financial crisis and whether the cause is ill health or redundancy, overspending or poor financial acumen, the result is the same; you owe money and at the moment you cannot pay it back.

There are two ways to approach a debt situation. You can go down the self help route or get some help from a debt counseling service. Each route has its merits but it will depend on what works best for you. And, the level of debt is also an important factor.

Managing & Paying Down Debt
Part 1 American Debt – An Overview
Part 2 Types Of Debt
Part 3 Debt Management – Doing It Yourself
Part 4 Debt Help – Getting The Assistance You Need

About the author

Mark Larsen

Mark Larsen has worked in the finance industry for over 20 years. Over the course of his career, Mark has amassed experience in personal finance and especially short-term lending. He shares his valuable insights on onlinecreditusa.com