As a general rule, it’s a good idea for people to keep their debt to a minimum. But as a nation, we’ve managed to rack up more debt than ever before.
U.S. household debt increased by a whopping $313 billion during 2021’s second quarter, according to the Federal Reserve Bank of New York. That’s the largest percentage increase in 7.5 years.
All told, Americans held $14.96 trillion in debt at the end of June. That represents the highest level on record and $812 billion more than what was owed at the end of 2019, before the pandemic began.
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Credit card balances are up
Credit card debt is generally considered the least healthy type of debt to have. Not only does credit card debt cause consumers to rack up interest charges, but too much of it can cause damage to credit scores.
U.S. credit card balances increased by $17 billion during 2021’s second quarter. However, the good news is that they’re still $140 billion below the levels seen at the end of 2019.
Auto loan balances rose as well
Vehicle prices have soared this year as chip shortages have prevented new cars from hitting the market. Not surprisingly, auto loan balances increased by $33 billion during 2021’s second quarter. And while it’s always best to borrow less money for a car rather than more, auto debt isn’t the worst type of debt to have.
Though cars don’t tend to gain value over time (quite the contrary — new cars typically lose value the moment they’re driven off the lot), they’re an important asset to own. For many people, having a car is a necessity for getting to work.
Mortgage debt is also up
Mortgage debt was actually the largest contributor to the overall rise in household debt last quarter. Americans took on $282 billion more in mortgage debt during the second quarter of the year, bringing that total to $10.44 trillion. That number includes new purchase mortgages as well as refinances.
Taking on too high a mortgage is never a good thing, as it puts consumers at risk of falling behind on their housing payments as well as other bills. But mortgage debt happens to be one of the healthiest types of debt to have (if not the healthiest). Mortgage debt allows borrowers to eventually own an asset that has the potential to increase in value over time. Plus, there are tax benefits to carrying a mortgage — the interest on a home loan is deductible for those who itemize on their tax returns.
Is more consumer debt a bad thing?
To a degree, rising debt during the past quarter could be taken as a sign of a healthier economy. When people’s personal finances improve, they’re more apt to go out and spend money.
On the other hand, the rise in credit card debt is a bit concerning due to the dangerous nature of that specific debt category. It’ll be interesting to see if consumer debt continues to increase at such a rapid pace in the upcoming quarter, especially at a time when the economy may be facing setbacks due to the trajectory the pandemic has taken in recent weeks.