Frugality and minimalism may be all the rage these days, but Americans’ household debt continues to creep up, a new NerdWallet study finds.
In the past decade, U.S. household debt has increased by 11%. The average household with any kind of debt owes $132,529, and total debt owed by U.S. consumers is $12.35 trillion.
The study examines how growth in the cost of living has compared to income growth, how household debt levels today compare with those during the recession, and how Fed rate increases affect consumer debt.
Consumers aren’t getting paid enough to keep up with rising prices
Over the past 13 years, the cost of living has increased 30%, while median household income has increased just 28%. Driving the disparity: Since 2003, medical expenses have grown 57%, food and beverage costs have gone up 36%, and housing costs have grown by 32%.
Of the expenses that haven’t grown faster than income, perhaps the most surprising is education, which has increased 26% since 2003. At the same time, student loan balances are still growing, but annual growth has slowed considerably. With an improved economy and stronger regulations on for-profit schools, college attendance is down, and more people are opting for full-time work following high school graduation.
Total debt is about to surpass pre-recession levels
Based on Federal Reserve data, NerdWallet projects that total household debt will reach $12.5 trillion by the end of 2016, surpassing the total debt of $12.37 trillion in December 2007, at the start of the Great Recession. The recent increase in debt can largely be attributed to mortgages and student loans, not credit cards. Credit card debt isn’t projected to hit recession levels until the end of 2019.
The fact that debt is approaching pre-recession levels doesn’t mean another economic downturn is likely. Other signs of a recession aren’t there. Delinquencies are flat, inflation rates are down and the housing market is trending up. These are all positive signs for the economy.
Credit card debt costs a typical household $1,292 a year
NerdWallet recommends that credit card users pay their balances in full each month to avoid interest — but not everyone uses credit cards this way. The average household that carries credit card balances from one month to the next pays $1,292 in credit card interest per year. That’s more than $100 a month for the privilege of having credit card debt.
Credit card debt is among the most expensive types of debt, and it’s probably about to become even more expensive. The Federal Reserve is expected to increase short-term interest rates by 0.25 of a percentage point this week. This will affect all types of debt with variable rates — and almost all credit cards have variable rates.
A 0.25-percentage-point bump would increase that average annual credit card interest figure to $1,309. This isn’t expected to be the last Fed rate hike, though, so the number could continue growing if consumers don’t pay off their balances once and for all.