The American Consumer Debt Crisis: Where We Are Now

American consumers have been overloaded with debt for the past several decades, and for a long time, the problem only seemed to be getting worse. Now, the latest information illustrates how much progress the nation has made-and whether we still need to be worried about the effects of lasting consumer debt.

The Statistics

Last month, total consumer debt in the United States hit $4 trillion. That’s the highest it’s ever been, and an indication that consumer debt is still growing. One contributing factor for the spike was holiday spending throughout November and December, which added more than $41 billion to outstanding balances. Currently, automobile financing is responsible for a disproportionate rate of growth, but credit cards are also a problem; the average American has total credit card debt of $4,293, and total credit card debt all over the country alone has surpassed $1 trillion.

It’s also worth noting that student debt is at an all-time high as well, and seems to be climbing ever-higher. In the United States, there are more than 44 million people with lasting student debt, owing a collective $1.5 trillion. The average borrower has something like $37,000 in student loan debt alone, many times higher than the average American’s credit card debt.

Overall, it seems that the American consumer debt crisis is only growing worse.

Possibilities for Those With High Debt

There are some reasons to be optimistic, however. Debt isn’t purely a bad thing; if a person goes into debt getting a bachelor’s degree, they will, on average, make more than $400 more per week than someone who graduated high school but didn’t obtain a degree. That amounts to more than $20,000 extra per year, on average, throughout their career. With that kind of salary boost, they could feasibly pay off the debt in the span of a few years, then enjoy the proceeds of their extra earnings for the remainder of their life.

And while high amounts of existing debt may negatively impact someone’s credit score, there are still plenty of loan options for people with bad credit. It may not be possible to buy a dream house or score the lowest possible interest rate, but living with high debt is manageable.

Economic Effects

Is it rational to worry about the effects of consumer debt in the first place? How does consumer debt affect the economy overall?

  • Growth and upward momentum. Some debt encourages a cycle of upward mobility, and further consumer spending. Consumers spend money on something today that allows them to achieve a better long-term financial position, such as a higher-paying job, resulting in more total consumer spending, and more wealth generation overall. In this way, low-interest consumer debt can be seen as a good thing.
  • Defaulting. However, if consumers take on more debt than they can feasibly pay, or if they fall victim to excessively high-interest forms of debt, they could eventually default. In other words, they won’t be able to pay back the principal and may lose their homes, cars, or other possessions.
  • Recessions and ripple effects. If enough people default, or begin to struggle due to their high levels of debt, it could create a reduction in consumer spending, and the entire economy could suffer a recession.

Why the Crisis Isn’t Improving

Overall, there are both benefits and risks to higher levels of consumer debt. Accordingly, it’s prudent to be aware of how much debt society is taking on. Right now, it’s arguable that American consumers hold too much personal debt, in too many different areas. So why isn’t this crisis improving?

Part of the problem is the rising barrier to entry in major career fields. Having a bachelor’s degree is now seen as a kind of mandatory minimum requirement, but it often results in graduating with tens of thousands of dollars in debt. Graduates enter a highly competitive market where practically everyone has some kind of college degree, so they’re forced to take a lower-paying job as a result. This makes it harder to pay off their initial debt and achieve financial stability, which may cause them to take on even more debt in the future.

Another problem is the ease of obtaining credit. One of the biggest motivating factors in the 2008 economic recession was a housing bubble created by too many American homeowners getting mortgages in excess of what they could feasibly afford. Today, car loans are being distributed with almost as much blatant disregard.

It’s unlikely that the American consumer debt crisis will go away anytime soon, but it may evolve. Consumers may favor some types of debt over others, or hopefully, will master financial habits that allow them to stave off the worst effects-and shield the economy from the possibility of a decline.

Melissa Thompson writes about a wide range of topics, revealing interesting things we didn’t know before. She is a freelance USA Today producer, and a Technorati contributor.