When the coronavirus pandemic first hit, many consumers cut back on spending in order to conserve their funds. But now that the economy is healthier and jobs are easier to find, consumers are spending more.
On the one hand, it is a good thing for the economy. On the other hand, these habits can lead some people to go into unhealthy debt.
The Federal Reserve Bank of New York reported that consumer debt hit an all-time high in 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 Causes Increased Debt?
Not only are consumers more comfortable with the idea of spending money, there has also been less help for everyone. The latest round of stimulus checks to hit Americans’ bank accounts was launched in March, and although some households still receive monthly payments from the enhanced child tax credit, a lack of additional help may spur more people. to accumulate credit card balances. .
The good news in this regard is that total credit card balances are down from what they were at the end of 2019. At the same time, these balances increased in the third quarter of the year compared to in the second trimester. As the holiday season approaches, consumers already in debt risk adding to these piles.
Mortgages, which account for the largest share of consumer debt, rose $ 230 billion in the last quarter. As house prices have been inflated this year, borrowers are taking out larger loans to finance their homes.
Finally, auto loans increased by $ 28 billion in the third quarter. Car prices have also been higher, so it’s no surprise that consumers are borrowing more to finance their vehicles.
Let’s not forget about inflation
Inflation has been another major factor in the rise in consumer debt. Today, the cost of daily expenses, from gasoline to groceries, is considerably higher than it was earlier in the year. For consumers living from paycheck to paycheck, putting those expenses on a credit card may be their only option.
A mixed bag
A slight increase in mortgage debt is not a bad thing. Quite the contrary, homeownership can lead to financial stability, so seeing total mortgage debt higher is nothing to worry about.
Likewise, auto debt is considered a relatively healthy type. It’s not as healthy as mortgage debt because home loans help borrowers own an asset that tends to increase in value over time. Cars, on the other hand, tend to lose value over time. However, having a car is essential to everyday life and, in many cases, keeping a job. And so, auto debt is a reasonable type to have.
Credit card debt, on the other hand, is not healthy. Not only can this be costly from an interest point of view, it can also lead to credit score damage (whereas mortgage and auto debt won’t hurt consumers’ credit as long as these loans are paid on time). The fact that it is in place is not a positive thing.
Yet many people are trying to regain their financial balance after a very trying year and at a time when inflation is wreaking havoc. It is not shocking that credit card balances have increased over the past quarter. If this trend continues, however, it could be a sign that many consumers are headed for a personal financial crisis.