Why Americans’ Personal Debt Has Dropped More Than 20% Over the Last 2 Years
Although the average American with debt holds $23,325 in non-mortgage debt, that’s actually a major drop from just two years ago. In 2019, the average American with debt held $29,800 in non-mortgage debt, so this new figure represents a 20% decrease, a recent Northwestern Mutual study found.
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But what’s caused this decline in debt over recent years?
Americans May Have Shifted Priorities
There are a few factors that could have led to the drop, including a favorable economic climate and a shift in priorities.
“From 2019 to 2020 to 2021, we’ve seen a steady decline each year in the amount of consumer debt that the average individual carries,” said Chantel Bonneau, CFP, a wealth management advisor with Northwestern Mutual. “That talks a lot about people taking advantage of what has been a good market, a pretty good labor environment pre-pandemic, and really prioritizing paying down debt to free up and progress themselves financially. That’s really exciting.”
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The Pandemic Has Also Played a Role in the Decrease in Debt — for Some
“One of the side effects of the pandemic that helped so many Americans reduce their debt was, No. 1, if they had student debt that was deferred, it allowed them to prioritize consumer debt instead, and No. 2, you just didn’t have anywhere to spend money and you were cutting back on things that had accidentally gotten out of hand,” Bonneau said. “You weren’t going out to restaurants or [going on] vacations or buying work clothes or makeup. All of those factors allowed people to significantly reduce their discretionary spending, and it’s one silver lining of the pandemic. It really gave people a reset and the opportunity to reevaluate where they spend money.”
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However, the pandemic didn’t affect every American’s debt levels equally. The study found that 34% said it will take longer than expected to pay off their debt because of the pandemic, while 23% expect to be able to pay it off sooner.
“The pandemic did lots of interesting things to people’s personal finances,” Bonneau said. “Some people were winners, financially speaking. They were able to cut down on child care costs, cut down on dog walking, trips, dinners out — a lot of things that allowed them to really save or pay off debt and make real progress. They put their stimulus checks toward paying down their debt. They deferred student loans at 0% so they could shift that money to pay off consumer debt. There are a lot of people that really used this as an opportunity to make huge strides that maybe would have taken them two, three, four, five years in another circumstance.”
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On the other side, there were those who struggled financially during the pandemic and may have had to take on more debt.
“There were people who lost their jobs or had family members that lost their jobs, and they needed to chip in on that front, and they needed to prioritize things differently,” Bonneau said. “So during that situation, your dollars maybe had to support not just one household but two. That was really challenging for a lot of people.”
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Credit Card Debt Is the Top Source of Non-Mortgage Debt
The survey found that the top source of personal debt after mortgages is credit cards — and by a long shot. Nineteen percent of Americans with debt have credit card bills, 8% have a car loan, 7% have education loans and 4% have debt related to home equity/lines of credit.
“Consumer debt has been an issue in America for a long time because people live outside of their means,” Bonneau said. “And when it comes to consumer debt it’s a habit — you keep adding to it. Every time you have an unexpected car expense, or your best friend gets married and has a bachelorette party and bridal shower and wedding, people don’t say ‘no’ to those things, and they’re not planning ahead on their discretionary spending. And as we learned during the pandemic, there are a lot of people who don’t have an emergency fund. So if anything goes wrong or there’s an unexpected expense, it gets wrapped up on a credit card, unfortunately.”
And once you have credit card debt, it’s difficult to eliminate it.
“If they’re paying minimums or relatively low amounts, then that amount is actually growing,” Bonneau said.
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It’s Possible To Break the Credit Card Debt Cycle
Whether you’re a chronic overspender or you racked up credit card debt due to an emergency, it is possible to break out of the credit card debt cycle.
“If you have credit card debt, you can take two approaches,” Bonneau said. “One is the psychological approach. If you have several credit cards, try and pay off or prioritize the smallest one. Just get a victory. If you have a card that has $300 on it and another one that has $3,000 on it, try and pay off the small one. Babysit at night, take an extra shift, cut back on dining out for the month. Just do something to start making progress to get that psychological win.”
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Alternatively, you can start by paying off the debt with the highest interest rate.
“If you are mathematically inclined, overpay on the one that’s the highest percentage [interest rate] because that will help you to actually eliminate your debt faster,” Bonneau said.
Whichever method you choose, stay disciplined and do whatever it takes to keep making progress.
“I think where people go wrong is they just feel like they’ll always be in debt,” Bonneau said. “But can you find a way to earn a little bit of money? Or can you cut out expenses so that you can allocate more towards that debt? Those are the two choices.”
Bonneau also encourages people to really reflect on the spending behaviors that led to their credit card debt in the first place.
“The past year and a half has given people the opportunity to realize the spending behavior and habits that were not actually important to them,” she said. “Maybe they were just getting coffee every morning because that’s what they had done for 15 years and not because they actually like coffee. I would say to really think through what you learned from the pandemic. If there’s a place in your budget [where your spending no longer serves you, put those funds] toward paying down debt or saving, building an emergency fund, increasing your 401(k) — something that is going to help you be more financially strong. Make sure you’re spending money on something because you value it, not just because it’s what you’ve always done.”
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Last updated: Oct. 6, 2021
This article originally appeared on GOBankingRates.com: Why Americans’ Personal Debt Has Dropped More Than 20% Over the Last 2 Years
