The average American spends 9.5% of their income on debt each month. How do you compare?
Americans are deeply in debt.
- Total consumer debt in the United States is $16.5 trillion.
- Credit card debt is a particularly insidious form of debt.
- There are ways to tackle it, including taking out a debt consolidation loan and increasing your income.
Debt. Most of us have 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 hope a mortgage is in my future!) I’ve found talking about it helps, if only to find out that you’re not the only one who has creditors to pay.
By recent search for The Ascent, the total consumer debt in the United States is equivalent to $16.5 trillion. This is a record, according to the New York Fed’s quarterly Household Debt and Credit Survey. Why is this number so high? After the economic slump of 2020 and the early days of the COVID-19 pandemic, the economy has come back stronger and better than ever.
But this has led to supply chain and inflation problems. As a result, more Americans have had to resort to paying for living expenses with personal loans, credit cards and other forms of borrowing. How does that frightening $16.5 trillion figure break down for the average American? And if you are struggling with debt, what can you do?
What is the average US household debt?
The average American household has a debt of $96,371, per credit bureau Experian. According to the Bureau of Labor Statistics, the median weekly income for full-time workers in the third quarter of 2022 was $1,070, or $55,640 for 52 weeks per year. This is the median, which is not the same as an average figure, but it gives us a rough starting point to see that many US households owe more money than they earn. in one year. And the St. Louis Federal Reserve found that households paid 9.5% of their income for their debts in the first quarter of 2022.
All of those big total numbers are a little scary to contemplate, but it’s important to note that a majority of that $16.5 trillion is in the form of mortgage debt, at $11.39 trillion, and loan debt. automobile represents $1.5 trillion. The most disturbing figure is the $890 billion that Americans owe in credit card debt.
What’s wrong with credit card debt?
Credit card debt is insidious. Whereas compound interest can work in your favor when it comes to investing, it does terrible things for the credit card balance you may be carrying. Most credit cards charge interest daily, and the interest you owe is added to your balance. So every day you carry a credit card balance, the cost of repayment keeps increasing.
I will point out here that if you are indeed only paying 9.5% of your income for your debts, you are probably in pretty good shape. It is recommended that you keep your debt-to-income ratio (DTI) at 36% or less, especially if you hope to qualify for a mortgage, which is probably the largest amount of money an average person will borrow.
How can you reduce your DTI?
There are two ways to lower your DTI: you can repay your debts or you can increase your income. If you can manage both, that would be ideal. There are several ways to make it easier to pay off your debt. You may consider applying for a debt consolidation loan, which pays off your various debts and leaves you to worry about only one monthly payment. You might also consider a home equity loan if you own your home.
It’s definitely worth getting out of credit card debt sooner rather than later, as with the Federal Reserve’s interest rate hikes, it’s becoming more expensive. You can increase your income by seeking a raise at work, finding a new job, or even adding a side hustle. Using a side hustle to get out of debt and put money aside may mean giving up some of your free time, but it could be worth it.
Being in debt can be scary, and if your DTI is less favorable than that of the average American, you might be ashamed of it. But you’re in good company, and with hard work and the right tools at your fingertips, you can lower your DTI and improve your financial life.
The Ascent’s Best Personal Loans for 2022
Our team of independent experts have pored over the fine print to find the select personal loans that offer competitive rates and low fees. Start by reviewing The Ascent’s best personal loans for 2022.