American Consumer Debt Continues to Rise Amid High Inflation and Interest Rates

American citizens are sinking further into debt this year, with a significant increase in the amount of credit used and the time taken to pay it off, according to new Federal Reserve data. Between May and June, Americans used approximately $18 billion in credit, with consumer credit increasing at a seasonally adjusted rate of 4% throughout the second quarter.

A survey by Bankrate found that 60% of Americans have carried debt for longer than twelve months, an increase from 50% two years ago. The number of consumers carrying credit card debt from month to month has also risen, now standing at 47%. Nearly three-quarters of Americans currently have some form of debt, indicating that it is a nationwide problem.

The cost of borrowing has significantly increased since the pandemic, with the Federal Reserve initiating the most rapid round of monetary tightening in decades. This has made servicing personal debt more expensive. Caleb Vering, associate wealth advisor of Farnam Financial, expressed concern over the current state of affairs. He noted that with interest rates up to 5.4%, consumers are often paying 20% or more on their consumer debt.

High levels of inflation are another contributing factor to the growing struggle among consumers to manage and reduce their credit card debt. Kevin M. Arquette, CFP and Founder of WealthPoint Financial Planning stated that inflation is pushing people to rely on credit cards to maintain their standard of living, a practice he deems unsustainable.

The issue of chronic borrowing is often a quick fix for financial under-preparedness. A recent Bankrate survey showed that almost half of all U.S. adults (48%) say they have enough emergency savings to cover three months' worth of expenses. However, a majority (57%) are uncomfortable with their current level of emergency savings. Additionally, more than a third (36%) of Americans have more credit card debt than emergency savings – a level not seen since 2011.

Auto loan debt, according to data from the New York Fed, is the third-largest type of debt for American households, falling behind mortgages and student loans. Despite a slight decrease in car prices this year from last year's highs, they are still considerably more expensive than pre-pandemic levels, necessitating most consumers to borrow for vehicle purchases.

Personal finance experts recommend strategies like the 20/4/10 Rule to manage car debt. This involves making a 20% down payment, taking only four years to pay off the car loan, and keeping car costs to less than 10% of monthly income. Vering supports this strategy as a starting point but acknowledges that it may not be feasible for everyone.

Vering also highlights the sociological aspect of the debt problem, noting that people often finance lifestyles they can't afford with debt. He suggests that until there is a cultural shift away from flaunting borrowed money, the problem is unlikely to disappear.

On a more positive note, not all forms of debt are negative. Some debts can be constructive in the long run if they allow borrowers to eventually acquire assets. For instance, building equity in a home using a mortgage can lead to wealth creation.

Given the complexity of debt and its implications on various aspects of life, from finance to behavioral psychology and sociology, it remains an important area for further study and understanding.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.