The vast majority of Americans are in debt. In 2022, 77.4% of consumers had some kind of outstanding loan, according to the Federal Reserve. This may sound like bad news, but it really isn't. Here's why.
Being in debt isn't necessarily a bad thing -- it depends on the kind of debt
To understand why it's not necessarily a problem that so many Americans are in debt, it's helpful to look at exactly what we collectively owe.
In 2022, 42.2% of Americans had debt secured by their primary residence and another 4.4% had debt secured by some other kind of residential property. In other words, a good amount of this debt is mortgage debt.
By contrast, around 36.9% had vehicle loans, 45.5% had credit cards, and 10.5% had other installment loans. So, other than credit cards, mortgage debt is the most common type of household debt -- and mortgages account for the largest amount of outstanding debt by far.
The fact that so many people happen to have a loan on their home is not necessarily a bad thing, because mortgage debt is usually considered as good debt.
Here's why mortgage debt isn't typically a problem
Owing money on a mortgage is a bit different from having other loan balances.
First, mortgage debt tends to generally come with pretty affordable interest rates. While rates are higher now than they have been in years, many people have outstanding mortgages with rates in the 3%-4% range. That's a very affordable interest rate -- especially when you consider that mortgage interest is deductible on your taxes on loans up to $750,000 if you itemize.
So, those with mortgages may be paying a low rate and may even have that interest subsidized by the government. Because of that, it often makes sense to borrow to buy a home rather than paying cash for one -- even if you could afford to. You can get a better rate of return with other investments with your extra cash instead of using it to buy a house.
The other big reason why mortgage debt isn't like other debt is because it's secured by a house. If you have a mortgage, that means you own your own home. And owning your own house can be a good way to build wealth. Your net worth will go up in value as your property value increases -- and sometimes, if you live in the right place and bought at the right time, you can make a significant amount of money as property values rise.
Even if your home doesn't end up with a skyrocketing price tag, owning your own home can still help you build wealth because each mortgage payment helps you acquire a valuable asset. That's not true for most other kinds of debt payments.
So, while it's true a lot of Americans owe money, this isn't necessarily something to worry about because so much of it is mortgage debt. For those with outstanding balances on credit cards, though, that debt can be very expensive and often does nothing to help increase your net worth. If you owe money on your cards, make a plan to pay it off ASAP either by making extra payments or by reducing your interest rate with a balance transfer, or both.
Will your mortgage help you or hurt you?
While mortgage debt isn't a bad thing in most cases, you need to make sure buying a house is the right choice for you before jumping into borrowing for one. To do this:
- Don't spend too much: Aim to ensure your housing costs, including your mortgage and other expenses, are less than 25% of your household income.
- Make sure you're committed to staying in your home for a while: You typically don't want to buy a home if you plan to move in the first five years or so as you likely won't see your property go up in value enough to cover the transaction costs.
- Make sure you can qualify for a mortgage at a good rate: You'll typically want a credit score above 700 to get the best loan rates and ensure you aren't overpaying for a loan.
- Save a down payment: If you can save up a 20% down payment, you can avoid added costs of mortgage insurance that is needed to protect the lender. If you can't save that much, try to have at least 10% down.
If you are in a good financial position to buy and can qualify for a mortgage at a reasonable rate for a home you can afford, then a mortgage could very well be a good thing for your financial life and not a debt you have to worry about.
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FAQs
While most Americans are in debt, a good portion of that debt is mortgage debt. Mortgage debt is typically considered as good debt. Mortgages have lower interest rates than most other kinds of loans, and they are used to buy a home which is a valuable asset that can increase your net worth over time.
What is the #1 debt for American households? ›
Average mortgage and HELOC debt in 2024
Data source: Experian (2024), Federal Reserve (2024), Freddie Mac (2024). Mortgages make up 70% of American consumer debt. That number has risen consistently since mid-2013 and has recently accelerated as home prices hit record levels.
Why are Americans carrying so much debt? ›
U.S. credit card debt. The higher cost of everything from housing to high-tops to haircuts are a major culprit. Although inflation has moderated since it peaked in June 2022, Americans—particularly lower-income families—are relying more on credit cards to cope with the sticker shock.
What is the average debt of an American citizen? ›
The average debt an American owes is $104,215 across mortgage loans, home equity lines of credit, auto loans, credit card debt, student loan debt, and other debts like personal loans. Data from Experian breaks down the average debt a consumer holds based on type, age, credit score, and state.
Why is all debt not bad? ›
Debt can be considered “good” if it has the potential to increase your net worth or significantly enhance your life. A student loan may be considered good debt if it helps you on your career track. Bad debt is money borrowed to purchase rapidly depreciating assets or assets for consumption.
Who does the US own most of its debt to? ›
Japan and China have been the largest foreign holders of US debt for the last two decades. Japan and China held almost 50% of all foreign-owned US debt between 2004 and 2006. However, this has declined over time, and as of 2022 they controlled approximately 25% of foreign-owned debt.
How much debt does the average American have without a mortgage? ›
Average American Debt Load
That breaks down into $241,815 on average in mortgage debt, and an average of $23,317 in non-mortgage debt (including credit card, student loan, auto loan and personal loan debt). But these debt balances vary greatly depending on age group.
Which country has the highest debt? ›
Profiles of Select Countries by National Debt
- Japan. Japan has the highest percentage of national debt in the world at 259.43% of its annual GDP. ...
- United States. ...
- China. ...
- Russia.
Eliminating the U.S. government's debt is a Herculean task that could take decades. In addition to obvious steps, such as hiking taxes and slashing spending, the government could take a number of other approaches, some of them unorthodox and even controversial.
What is the main cause of US debt? ›
The federal government needs to borrow money to pay its bills when its ongoing spending activities and investments cannot be funded by federal revenues alone. Decreases in federal revenue are largely due to either a decrease in tax rates or individuals or corporations making less money.
How Many Americans Are Living Paycheck to Paycheck? A 2023 survey conducted by Payroll.org highlighted that 78% of Americans live paycheck to paycheck, a 6% increase from the previous year.
What is the average credit score in the US? ›
What is the average credit score? The average FICO credit score in the US is 717, according to the latest FICO data. The average VantageScore is 701 as of January 2024. Credit scores, which are like a grade for your borrowing history, fall in the range of 300 to 850.
What percentage of Americans are 100% debt free? ›
Around 23% of Americans are debt free, according to the most recent data available from the Federal Reserve. That figure factors in every type of debt, from credit card balances and student loans to mortgages, car loans and more.
How do the rich use debt to get richer? ›
Wealthy individuals create passive income through arbitrage by finding assets that generate income (such as businesses, real estate, or bonds) and then borrowing money against those assets to get leverage to purchase even more assets.
Is it smart to have no debt? ›
Without debt, you can focus on building more savings, investing those extra funds and just simply having more peace of mind about your finances.
Is being debt free the new rich? ›
In many ways, being debt-free is increasingly being regarded as the new rich. This doesn't necessarily mean having immense wealth in the traditional sense, but rather enjoying financial freedom and the peace of mind that comes with it.
What is the total debt of US households? ›
U.S. Household Debt Is at an All-Time High
The total household debt of $17.3 trillion entering 2024 is a new high for the U.S. The largest increase in any category was credit card debt, which swelled by 16.6% between Q3 2022 and Q3 2023, the most recent term for which federal data was available.
What is the debt to income ratio in the US households? ›
Household Debt Service Payments as a Percent of Disposable Personal Income (TDSP)
| Q4 2023: | 9.79693 |
|---|
| Q3 2023: | 9.77217 |
| Q2 2023: | 9.69601 |
| Q1 2023: | 9.71457 |
| Q4 2022: | 9.89256 |
1 more rowBasic Info. US Public Debt Per Capita is at a current level of 101.17K, up from 98.83K last month and up from 93.98K one year ago. This is a change of 2.38% from last month and 7.66% from one year ago.
How much debt is on each American citizen? ›
In 2023, the gross federal debt in the United States amounted to around 93,500 U.S. dollars per capita. This is a moderate increase from the previous year, when the per capita national debt amounted to about 92,528 U.S. dollars. The total debt accrued by the U.S. annually can be accessed here.
