When the pandemic shut down the economy and threw millions out of work last year, economists feared that credit card debt would soar.
It didn’t. In fact, a new study from Northwest Mutual found that consumers’ personal debt, excluding mortgages, actually went down, falling 20% over the last two years. The average consumer carried $29,800 in debt in 2019. This year, that number fell to $21,325.
"The fact that people are making significant progress to decrease their debt is encouraging to see, especially at a time when many are still recovering from the financial impact and uncertainties prompted by the COVID-19 pandemic," said Christian Mitchell, executive vice president & chief customer officer at Northwestern Mutual.
Paying off credit card debt
On the flip side of declining debt is the significant amount of money that consumers must spend to service that debt. The study found that 30% of the average Americans' monthly income is used to make payments on credit cards, car loans, and other non-mortgage debt.
That may be because the largest portion of consumer debt is on credit cards, which carry the highest interest rates. The average credit card rate is around 17%, and this type of debt makes up 19% of what consumers owe.
Auto loans account for 8% of consumer debt, with student loans not far behind at 7%. Home equity lines of credit make up about 4% of the average consumer’s debt load, researchers found.
Despite the lower overall debt load, many consumers still find it a heavy burden. Twenty-nine percent say they have put off a major purchase, 18% aren’t saving for retirement, and 14% have postponed the purchase of a home due to debt concerns.
"The latest numbers show steps in the right direction compared to previous years, but we continue to see debt hindering many Americans from having the financial freedom to make other important decisions in their lives," Mitchell said. "Having a plan of action to manage debt and stay on top of payments is critical to achieving future financial goals."
Paying off debt
The good news is that two-thirds of consumers who are in debt say they have a plan for paying it off, along with a specific timeline. About 45% said they expect to be debt-free within five years. Unfortunately, 9% told researchers that they expect to be in debt for the rest of their lives.
To reduce loan balances, ConsumerAffairs recommends following these tips:
Evaluate your finances and create a budget
Look for ways to increase your income and cut expenses
Find a debt repayment strategy that works for you
Pay more than the minimum balance
Seek help with credit counseling