Consumer Debt: How Do You Compare?

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After cutting back for three years, Americans are feeling more relaxed about borrowing and have started increasing their debt levels again. Is that smart? And how does your own financial situation compare?

Belts Begin to Loosen

From 2000 to mid-2008, the U.S. economy was powered by a massive borrowing binge. Total consumer debt, including mortgages, soared 140%, while inflation over the same period was less than 30%.

But as the recent recession took hold, consumers trimmed their borrowing, and total consumer debt declined by more than 10%. The drop in credit card debt was even greater. The number of cards outstanding fell by a quarter and overall balances declined by 16%.

(MORE: The 6 Best Travel Reward Credit Cards Right Now)

Apparently, consumers now feel they can afford to loosen their belts a bit. Total consumer credit outstanding bottomed last fall, and credit card balances – the most sensitive bellwether – rose at a 5.1% seasonally adjusted rate in May, the most recent month for which Federal Reserve data is available.

How Do You Compare?

Whether it’s smart to start borrowing again depends largely on how much debt you already have, compared with the typical household. To help you gauge your own situation, here’s a rundown of recent statistics. (These numbers are calculated in a variety of ways, so I’ll give them in round terms.)

The total amount of consumer credit outstanding, not counting mortgages, is a bit over $2.4 trillion. Since there are just under 120 million households in the U.S., that works out to an average of $20,000 of debt per household. Two-thirds of those households have annual incomes of $75,000 or less.

Generally, only one-third of that consumer debt consists of credit-card balances and credit lines. The other two-thirds is made up of car loans, student loans and the like. The average auto loan is just under $27,000.

The distribution of credit-card debt is very uneven. Some people have no cards, and one-third of households pay off their balances each month. Of the 50% to 60% who carry credit-card balances, a large minority have only a few thousand dollars on their cards. Just over a third of all households have sizable balances of $10,000 or more.

Mortgage debt is harder to evaluate. First, the interest on a mortgage is tax-deductible. And second, you have to live somewhere. So even if you avoided buying a home with a mortgage, you would be paying rent instead. Given the tax benefits and the fact that part of your mortgage payment would otherwise go for rent, mortgage debt is not as much of a liability as credit-card debt is.

Perhaps the most informative statistic the Federal Reserve calculates is the household debt-service ratio, which gauges the total burden of payments on all kinds of debt, including mortgages. Currently, it’s 11.5% of disposable after-tax income. That’s actually the lowest the ratio has been since 1995, but could rise sharply the next time interest rates move up. And it’s a figure that combines people who rent or have paid off their homes with people who have recently bought expensive houses.

(MORE: Your Credit Card Data is Probably at Risk)

Should You Reduce Your Debt?

The bottom line is that consumer debt and mortgage debt really aren’t a problem for the majority of U.S. households. And some of the remaining households are sufficiently affluent that they can afford to carry high debt levels.

There’s only potential cause for concern if you have more than $10,000 on your credit cards or a house that is much bigger and more expensive than you really need and is now worth less than you paid for it.

The acid test, of course, is whether you have difficulty scraping together the money for your mortgage, car and credit-card payments each month. But even if you can afford to carry a substantial debt load, there are good reasons for continuing to pay your balances down.

First, no one knows whether the economy will fall back into recession. Second, the Federal Reserve will not keep interest rates low forever. And third, money you pay for interest, especially on revolving credit (non-mortgage) debt, is a terrible waste unless the interest rate is very, very low.

If you figure that the yield on a high-quality fixed-income investment is 6% to 7% at most, paying double-digit interest on credit cards is simply throwing money away. Paying those balances down and saving on the interest will be a better investment than almost anything else you could do with the money. And best of all, the return is guaranteed.