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U.S. households increased debt by $1 trillion in 2021

The increase is the largest since 2007

U.S. debt and economy concept
Photo (c) sdominick - Getty Images
Americans borrowed money at a near-record pace in 2020, just a year after they sharply reduced credit card debt. A report by the New York Federal Reserve found that all types of household debt, from mortgages to auto loans and credit card balances, ballooned by $1 trillion, the largest increase in 14 years.

In addition to mortgage growth, the report showed that auto loan originations were big drivers of household debt. That, in turn, is a product of inflation. As the prices of new and used vehicles have surged since the start of the pandemic, consumers have often taken on more debt to purchase a car or truck.

Largest increase since 2007

Mortgage balances remain the largest component of household debt, rising by $258 billion. Credit card balances increased by $52 billion, while student loan debt actually declined by $8 billion, remaining roughly flat in nominal terms at the end of 2021 after almost two decades of steady increases.

"The total increase in nominal debt during 2021 was the largest we have seen since 2007," said Wilbert Van Der Klaauw, senior vice president at the New York Fed. "The aggregate balances of newly opened mortgage and auto loans sharply increased in 2021, corresponding to increases in home and car prices."

The report’s authors say new extensions of installment credit were at historically high levels in 2021 for both mortgages and auto loans. They note that mortgage originations were at $1 trillion in the fourth quarter of 2021. It contributed to a historic high in annual terms, with over $4.5 trillion in mortgages having originated over the course of 2021.

Managing debt is key

How consumers manage that debt may determine whether an increase in loan volume is a threat to the economy. After shopping around, Bob, of Annapolis, Texas, secured a debt consolidation loan through Sofi and is happy with the outcome.

“Got offers from other lenders at 20% or more (how does a D/C loan at 20% make any sense ?),” Bob wrote in a ConsumerAffairs review. “Sofi came through with an offer at a reasonable rate, much to my surprise, and I jumped on it. All done through website and email. Speed, accuracy, easy.” 

The report found that more consumers like Bob may need help managing their debt, noting that the credit scores of newly originated mortgages have declined in recent quarters from the beginning of the pandemic.

However, average scores remain elevated and suggest that newly opened mortgages and a higher share of refinances appear to be solid. The volume of newly originated auto loans was $181 billion during the fourth quarter, primarily because consumers were forced to borrow more to purchase ever-more-expensive cars and trucks. 

The report found that aggregate limits on credit card accounts increased by $96 billion and now stand at $4.06 trillion, $160 billion above the pre-pandemic level.

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