Debt-free Americans are a dying breed. We may not have as much debt as we used to, but collectively, we are still very much in the red. The average American now has $47,000 in debt, down from a peak of $53,000 in 2008. So if you have less than that, or if you have more but can keep up with monthly payments, you’re probably doing better than your neighbors.
On the other hand, if you have more debt than you can reasonably pay, that’s no reason to panic. You’re in good company. However, it would be a good idea to reexamine your finances and set goals to reduce your debt levels.
Total consumer debt has been falling steadily since 2008 at a rate not seen in nearly 50 years. Now Americans have $11.31 trillion in consumer debt, a decrease of about $1.37 trillion since the peak in 2008. It’s nice to believe this is all a result of people tightening their belts, paying down debts and spending less, but decreased debt is mostly the result of debt disappearing in cases like foreclosures and bankruptcies.
According to economists at Moody’s Analytics, about 80 percent of the debt decrease is a result of defaulted loans, while only 20 percent stemmed from voluntary cutting back.
Americans still have a long way to go. Even with high foreclosure rates over the last several years, more than $1 trillion of consumer debt – 9 percent – is still delinquent. This includes $740 billion of seriously delinquent debts, defined as 90 or more days past due.
The majority of debt remains in mortgages, with Americans holding $8 trillion of mortgage debt as of October 2012. This was more than 70 percent of the total consumer debt. The next largest sector of debt is student loans, coming in at $1 trillion. This is followed by auto loans and credit card debt, at $770 billion and $670 billion, respectively.
The delinquency rate for all loans currently stands at 6.55 percent. Mortgages and auto loans have the lowest delinquency rates. This is likely because they are secured debts and people understand that if they don’t pay, they can lose their property. At the end of the third quarter of 2012, only 4.25 percent of auto loan debt and 5.90 percent of mortgage debt was 90 or more days overdue.
In the most recently reported quarter, the student loan delinquency rate surpassed that of credit cards for the first time. In total, 11 percent of Americans’ student loans were 90 days past due, with the credit card rate trailing at 10.45.
Do You Have Too Much Debt?
Right now households are paying an average of just 16 percent of their take-home incomes toward paying down their debts. This is the lowest percentage since 1984.
It’s helpful to have a benchmark to compare to, but when you really try to analyze whether you have too much debt, you have to look at your personal situation. Experts say you could actually devote more than double the current average amount to debt payments. It’s reasonable for up to 36 percent of your post-tax income to go toward debt obligations, including mortgage payments.
Say you have a post-tax salary of $60,000, working out to $5,000 per month. By this measure, you could comfortably use up to $1,800 per month toward payments like credit card bills, mortgage payments and student loans.
If you’re above the marker of 36 percent, there’s a good chance your debt is eating up more income than you can spare. You may have trouble maintaining your lifestyle and saving up without accumulating more debt. To fix this, you can start examining your expenses and try cutting them down. Consider temporarily shifting your financial focus to bringing your debt down to a manageable level.
If you’re at the point that you can no longer afford your debt payments, look into debt reduction options like settlement and consolidation, which can get you back on track in part by reducing monthly payments.