Let’s Talk Consumer Debt

When it comes to being financially aware and financially healthy, there’s one thing that tends to affect people more than anything — and that’s consumer debt. Consumer debt is held by private individuals, as opposed to businesses,  for personal purchases. Put simply, it’s the everyday type of debt that piles up while we’re out here trying to live our lives. 

According to the Federal Reserve Bank of New York, household debt in the U.S. climbed to $15.24 trillion by the end of 2021 — a 1.9% increase from the previous year. Mortgages hold the largest piece of this debt, followed by student loans, and then credit card debt.

What are the different types of consumer debt?

Some debt is necessary in building credit and making a life – but gaining knowledge around how we use and think about debt is important in keeping it under control. Let’s take a closer look at these 3 types of consumer debt so we know when and how debt can be useful, and when it turns harmful.

1. Student loans

Student loans are usually the first type of debt taken on to afford higher education. With the cost of education on the rise, Forbes has recorded student loans at an all-time high of 1.7 trillion as of 2021. Typically, student loans are made on a 10-year payment plan, but the United States Census shows that it’s taking an average of 19.5 years to pay them off. This is affecting the entire economy by weighing heavily on younger generations, pulling credit scores down, and resulting in less home ownership in the long-run.

There are now debt forgiveness plans in place to relieve student loans under certain circumstances – for example, people who teach in low-income schools, work in public service, or have a disability.

Quick tip: Those who feel they may qualify for student loan forgiveness should reach out to the company that handles their loan payments. 

2. Credit card debt

When used correctly, credit card debt can be kept under control and could even help you build your credit up to make those big-ticket purchases later on. And, when you make your monthly payments on time for long enough, your credit score could go up. However, the way credit card debt can quickly become harmful is by only paying the minimum requirement for too long or opening up too many cards at a time. Credit card companies purposefully make both options extremely easy for users.  

Quick tips: Try to pay above the minimum as much as possible. That will keep interest charges down. Also, create healthy habits around spending, so you never spend more than you can pay off each month.

3. Mortgages

Mortgages are the loans you take out against a property you want to buy, and currently make up the largest percentage of consumer debt. The rise of mortgage debt – up by $230 billion – isn’t surprising because of the pandemic and resulting recession. Through the financial struggles of 2020 and 2021, people have realized, more than ever, the positive effects of owning property. Mortgage debt is the kind that stimulates the economy and helps establish some financial security for individuals — as long as the mortgages can be truly afforded.

Quick tip: If you start with a higher down payment, you might be able to set lower monthly payments.

At CIFS, we believe in helping you create healthy habits and mindfulness around everyday financial decisions with educational content and resources. Learn more here!

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