Household Debt Surges at Fastest Pace Since 2007

At a time when interest rates are high on virtually all types of loans — from new mortgages to variable-rate credit cards — household debt balances are growing at the fastest pace since before the Great Recession.

Total household debt has risen by $2.75 trillion since the end of 2019, according to the Federal Reserve Bank of New York, led by growing mortgage balances and a spike in revolving credit card debt this year as inflation offsets wage growth. As of the fourth quarter of 2022, overall debt balances are at a record high of $16.9 trillion. That’s a 2.36% quarter-over-quarter increase, the highest rate since the third quarter of 2007.

“Although historically low unemployment has kept consumers’ financial footing generally strong, stubbornly high prices and climbing interest rates may be testing some borrowers’ ability to repay their debts,” New York Fed economic research advisor Wilbert van der Klaauw says in a news release.

The combination of rising interest rates and growing consumer debt means that many Americans are faced with higher monthly debt payments, causing imbalance for household budgets that are already strained by surging inflation. Here’s how outstanding debt balances have changed over the past few years and what you can do if you’re struggling to repay your debt.

Mortgage Balances Grew $2T During Pandemic Housing Boom

Record-low mortgage rates spurred homebuying activity in 2020 and 2021, giving many Americans the opportunity to afford a home. But this surge in demand also pushed median home prices to an all-time high of $413,800 in June 2022, according to the National Association of Realtors. Although slowing demand has caused home prices to stabilize in recent months, many of those who bought a home over the past few years are left with high mortgage balances.

Now that mortgage rates are double what they were just over a year ago — around 6% to 7% rather than below 3% — homebuying activity and mortgage originations have slowed dramatically. Mortgage interest rates are widely expected to fall during 2023, but it’s highly unlikely that they’ll ever drop to the sub-3% levels seen during the pandemic.

As a result, homebuyers and sellers must adapt to a new normal. Home prices are no longer being propped up by rate-driven demand and cutthroat bidding wars, but monthly mortgage payments remain elevated due to current interest rates. Consumers who need a mortgage are constrained by much higher borrowing costs, although homebuyers may be able to take advantage of a more balanced market with home price negotiation and seller-paid mortgage rate buydowns.

Cutting down on existing mortgage debt in the current rate environment can also be a challenge. The vast majority of homeowners have a mortgage rate that’s lower than what’s currently available, so refinancing typically isn’t worthwhile. Overall mortgage debt balances reached nearly $12 trillion by the fourth quarter of 2022, jumping almost $2 trillion from the same quarter in 2020, but are not likely to continue growing at the breakneck pace seen over the past two years.

[Read: Best Mortgage Lenders.]

Credit Card Balances Spike to Record High

Consumers took advantage of stimulus checks and reduced spending during the first year of the pandemic as an opportunity to pay down credit card debt. U.S. credit card balances plummeted from $927 billion in the fourth quarter of 2019 to $770 billion in the first quarter of 2021, a reduction of 17% in just over a year.

However, that trend sharply reversed as spending returned to pre-pandemic levels in 2021 and inflation pushed household budgets to the limit in 2022. During these past two years, revolving credit card balances have surged 28% to a record high of $986 billion, more than erasing the progress Americans made paying down their debt during the pandemic.

At the same time, variable credit card annual percentage rates rose significantly as the Federal Reserve implemented a series of rate hikes in 2022. The average credit card interest rate increased from 14.6% in 2021 to 19.07% currently, Fed data shows. With rising debt balances now being assessed higher interest rates, consumers can expect to pay more toward their credit card payments without making as much progress on paying down their principal balance.

If you’re struggling to repay credit card debt, it’s more important than ever to make more than the minimum payment in order to cut down on interest charges. You can also employ a debt repayment strategy, such as a credit card balance transfer or debt consolidation loan.

[See: Best Personal Loans for Credit Card Refinance.]

Auto Loan Balances Rise Alongside Car Prices

Global supply chain issues and higher production costs caused both new and used car prices to surge during the pandemic. Prices for used cars rose 38% in 2021, according to the consumer price index, while new car prices rose 14% in that time, Kelley Blue Book reports. Although used car prices have been steadily falling in recent months, the average transaction price for new vehicles hit a record high of $49,507 in December 2022 — an increase of more than $8,000 in just two years.

Given the rapid rise in car prices, it should come as no surprise that auto loan balances have increased in turn. Outstanding auto loan debt has doubled over the past decade, reaching an all-time high of $1.55 trillion in the fourth quarter of 2022. Meanwhile, interest rates on 60-month new car loans have increased from 4.82% in 2021 to 6.55% currently, Fed data shows.

Reducing your auto loan debt in today’s rate environment can be difficult, since auto loan rates have risen over the past two years. It may be possible to refinance your car loan at a shorter term to reduce your interest rate and pay off debt faster, but this can result in higher monthly payments. Still, it’s a good rule of thumb to avoid a long-term auto loan, since car values tend to depreciate more quickly than other secured assets, such as houses.

[READ: Best Auto Loan Rates and Lenders.]

Student Loan Debt Has Leveled Off Since Payment Pause

In a welcome exception to the trend of rising household debt balances, outstanding student loan debt has plateaued since the start of the federal student loan payment pause in March 2020. With interest rates on federally held student loans set to 0% during the past three years, many borrowers have been able to pay down the principal balance of their loans and reduce their overall debt. Additionally, the Department of Education under President Joe Biden has provided about $48 billion worth of targeted student loan relief through programs such as Public Service Loan Forgiveness and borrower defense to repayment.

However, this temporary relief measure will likely end soon. The Department of Education says that the student loan payment pause will last until 60 days after June 30, 2023, at the very latest, although repayment (and interest accrual) may begin earlier. It’s all dependent on whether the Supreme Court will uphold Biden’s student loan forgiveness plan and how the department will move forward if student debt relief is struck down.

With so much riding on the Supreme Court’s decision, it’s difficult to tell where student loan balances are headed beyond that. Still, we can speculate on two scenarios. If the Biden administration is able to implement its student loan forgiveness plan, about $430 billion of the total outstanding student loan debt would be canceled, the Congressional Budget Office estimates. But if the plan is struck down and interest begins to accrue again starting in late August, the $1.6 trillion student loan balance will continue to grow.

Of course, Biden’s student loan relief plan only applies to federally held student debt, not private student loans, which make up about 7.6% of the outstanding student loan balance, according to the data exchange platform MeasureOne. Private student loan borrowers who aren’t eligible for federal relief could consider refinancing to pay off their debt faster.

[READ Best Student Loan Refinance Lenders]

What to Do If You Can’t Manage Your Debt

With households burdened by growing debt balances and rising interest rates, keeping up with your financial obligations can be difficult. If you’ve tried consolidating your debt or refinancing your loans, but you still can’t make your monthly debt payments fit into your budget, there are several avenues for seeking help:

Call your creditors. Get in touch with your creditors, such as your credit card company or mortgage lender, to see if you’re eligible for hardship programs such as a temporary interest rate reduction, forbearance or payment deferment. Explain your financial situation — maybe you’ve lost your job or been diagnosed with a chronic medical condition. Be sure to get the details of any hardship agreement in writing so you’re not mistakenly penalized with late fees or other finance charges.

Meet with a credit counselor. Research credit counseling agencies in your area to find nonprofit money management services, including free financial advice and low-cost debt management plans. A credit counselor may also be able to negotiate with creditors on your behalf to reduce your interest rate or waive late fees.

File for bankruptcy. Bankruptcy offers a fresh start, allowing you to discharge high amounts of unsecured debt that you can’t afford to repay. However, declaring bankruptcy has a long-lasting negative impact on your credit, and the process can be expensive, since you’ll typically need to hire an attorney. Additionally, you may need to liquidate nonexempt assets, depending on the chapter of bankruptcy you choose.

[CALCULATE: Use Our Free Loan Calculator to Estimate Your Monthly Payments.]

More from U.S. News

How to Manage Your Debt Before a Recession

2023 Mortgage Forecast: Rates Expected to Decline

What Are Your Options After You Default on Student Loans?

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