Debt doesn’t have to be bad. Loans allow many Americans to own homes, drive their own vehicles to work, and achieve higher levels of education. But how much debt is too much?
According to information released on July 26, 2023, by the St. Louis Federal Reserve, consumer credit card and other revolving debt has risen to an astonishing $1 trillion—the highest level of credit card debt on record. To put that into perspective, Americans owed around $213 billion at the start of August 2000—less than a quarter of what they owe today.
Consumer Loans: Credit Cards and Other Revolving Plans, All Commercial Banks
source: Board of Governors of the Federal Reserve System (US)
But what does this mean for our nation’s economy, and what happens what that debt comes due?
Interest rates and delinquencies in debt repayment are also on the rise—and they may be about to get worse.
According to an August 4, 2023, article by Yahoo Finance, interest rates on credit cards remain at 40-year highs. Meanwhile, the article reports, “Delinquencies, especially among young borrowers,” are also increasing. Specifically, the New York Federal Reserve reported that at least 8.5% of Americans 18 to 29 “[are] at risk of slipping 90+ days behind on payments” according to the article mentioned above.
Add the fact that federal student loan interest will resume on September 1, 2023, with payments starting in October, and we may be looking at a recipe for even more record highs when it comes to consumer debt.
“The problem,” says VantageScore president and CEO Silvio Tavares, “is that if [consumers] haven’t had to pay a loan for three years, a lot of people don’t have that money in their budget.”
Tavares may be right. According to a June 2023 survey by Quicken Inc., 39% of Americans are currently living paycheck to paycheck with “no end in sight.”
As consumer debt continues to increase, so does market uncertainty.
Something I always try to keep in mind whenever I consider taking out a loan is that at some point, the money will need to be repaid. The same is true for the $1 trillion in credit card debt currently held by Americans. And as the article above states, “Rates on credit cards have been driven to record highs by the Fed’s relentless campaign to cool inflation,” making it even harder for Americans to pay off their debts—which means that debt will only continue to grow.
At some point, the repercussions of so much consumer debt will become clear. And with an economy that many analysts still believe is headed for recession, I can only wonder what those repercussions might be.
Economic uncertainty may present an opportunity for those of us who like to plan for the long term.
One way to help protect your savings now is to explore your diversification options.
Record consumer debt is just one sign of possible issues to come for our economy. None of us can see the future, but if consumers are forced to use their available funds to repay soaring debt, that may mean less money going into the rest of the economy. That is, after all, the goal of the Federal Reserve’s interest rate increases—borrowing becomes more expensive, which helps slow down the economy and, hopefully, slows down inflation.
This sort of uncertainty is why I try to set my portfolio up for long-term success rather than short-term gains. I still like to reexamine my asset mix from time to time, but by diversifying my portfolio with a variety of assets, I believe I can lower my overall risk exposure and help protect my hard-earned savings and retirement.
By using hard, physical assets like gold as a foundation for my diversification strategy, I feel confident knowing that a part of my hard-earned savings is kept in the form of an asset that has historically been seen as a hedge against the exact sort of market uncertainty that can be created by soaring consumer debt or market volatility.
I may not be able to control what other people do with their money (or debt), but with enough forethought and careful planning, I plan to continue working hard to build a better financial future for myself and my loved ones.
