Consumer Debt Hits a Record High, Federal Reserve Reports

A woman shopping in a department store.

Image source: Getty Images

When the coronavirus pandemic first struck, many consumers pulled back on spending in an effort to conserve funds. But now that the economy is healthier and jobs are easier to come by, consumers are spending more.

On the one hand, that's a good thing for the economy. On the other hand, those habits may be driving some people into unhealthy debt.

The Federal Reserve Bank of New York has reported that consumer debt reached a record high during the third quarter of 2021, amounting to $15.24 trillion. That's an increase of 1.9%, or $286 billion, from the second quarter of 2021.

What's driving an increase in debt?

Not only are consumers getting more comfortable with the idea of spending money, but there's also been less aid to go around. The last round of stimulus checks to hit Americans' bank accounts went out in March, and while some households are still getting monthly installment payments from the boosted Child Tax Credit, a lack of extra aid may be prompting more people to rack up credit card balances.

Now the good news in that regard is that total credit card balances are down compared to where they were at the end of 2019. At the same time, those balances rose during the third quarter of the year compared to the second quarter. With the holiday season approaching, consumers with existing debt risk adding to those piles.

Mortgages, meanwhile, which comprise the largest share of consumer debt, rose by $230 billion last quarter. Given that home prices have been inflated this year, borrowers are taking out larger loans to finance their homes.

Finally, auto loans increased by $28 billion during the third quarter. Car prices, too, have been higher, and so it's not surprising that consumers are borrowing more to finance vehicles.

Let's not forget inflation

Inflation has been another big driver of rising consumer debt. These days, the cost of everyday expenses, from gas to groceries, is considerably higher than it was earlier in the year. For consumers living paycheck to paycheck, putting those expenses on a credit card may be their only option.

A mixed bag

An uptick in mortgage debt isn't a bad thing. Quite the contrary -- homeownership can lead to financial stability, and so seeing higher total mortgage debt isn't something to worry about.

Similarly, auto debt is considered a relatively healthy kind to have. It's not quite as healthy as mortgage debt since home loans help borrowers own an asset with a tendency to gain value over time. Cars, by contrast, tend to lose value over time. But still, having a car is essential to everyday living and, in many cases, holding down a job. And so, auto debt is a reasonable kind to have.

Credit card debt, on the other hand, is not healthy. Not only can it be costly from an interest standpoint, but it can also result in credit score damage (whereas mortgage and auto debt won't hurt consumers' credit provided those loans are paid on time). The fact that it's up is not a positive thing.

Still, a lot of people are trying to regain their financial footing after a very trying year and at a time when inflation is wreaking havoc. It's not shocking to see that credit card balances rose this past quarter. If that trend continues, though, it could be a sign many consumers are heading for a personal financial crisis.

Earn up to 5% back and wipe out interest until 2023

Our in-house credit card expert loves this top credit card pick, which features a 0% intro APR until 2023 that can help you avoid interest charges on new purchases or pay off debt faster using simple balance transfer strategies. Plus, this pick packs in an insane cash back rate of up to 5% with no annual fee. In fact, this card is so good that our credit card expert even uses it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More