How Our Consumer Debt Problems Got Out of Control

November 4, 2009 by Silicon Valley Blogger

Should I get a personal loan? At any given point in time, that’s what a whole lot of us are pondering. Taking on consumer debt has become one hard habit (or vice) to break.

One of the most eye-opening profiles on consumer debt that I’ve seen was one from the New York Times, where they presented a whole bunch of articles and multimedia elements to answer the question: how the heck did America get in the current financial mess it’s in right now? How did we fall into such a deep debt hole?

9 Decades of Consumer Debt: How Our Debt Problems Got Out Of Control

There’s a lot we can discuss about in this series (aptly called The Debt Trap) but I wanted to focus a bit on the interactive feature that gives us a look at consumer debt throughout the years (nicely illustrated by Amy Schoenfeld and Matthew Bloch). The graphic is entitled “The American Way Of Debt” and shows the average household debt and annual savings in today’s dollars, throughout nine decades (1920 – present). It’s pretty incredible to see just how much our love affair with personal loans, 0% APR credit cards and mortgages has caused our household debt to balloon to unprecedented levels (click on the image to enlarge it):

consumer debt
Image from the NY Times

This pic shows the history of our consumer debt (in blue) and our savings (in orange). There are a few notable aspects here, such as how the annual savings rate during our current decade is the lowest it’s ever been — rivaling only the savings rate during the depression years (1920s – 1930s). Then during wartime years in the 1940s, there seemed to be a peak in savings, with American households saving up to $12,800 a year (wow); this situation was credited to wartime restrictions on credit, but by the end of this period, people went back to borrowing more and saving less.

Over time, we see how various debt instruments and products are introduced to the general population. Adjustable rate mortgages pop up in the 70’s, along with Sallie Mae, the largest lender for student debt. The 70’s was also the time when credit card debt began to pick up traction.

Then in the 80’s, we see how debt shifts to mortgages, and this seems to be the turning point for mortgage-backed securities — when lenders began to transfer some of the risk they were bearing onto investors. And things get progressively worse (debt-wise) all the way to the present time, where we now face these sobering facts:

In the 2000s, debts soar with rising home prices, historically low rates and increased access to credit. Only a quarter of households have no debts.

  • Mortgages: Home ownership rises to nearly 70%. 31% of homeowners have no mortgage debt.
  • Installment Debt: Two thirds of college students have student loan debt, up from half in the 1990s.
  • Credit Card Debt: 40% of households carry a credit card balance, up from 6% in 1970. The average household carries 13 cards.

I believe that our collective household finances have never been worse than in recent years: savings have pretty much evaporated with families saving an average of $300 to $400 a year, while dealing with a debt load that’s as immense as ever. The graph shows that all types of debt are up — from credit card debt and installment loans to home equity loans and mortgages. The average debt load has blown past $100,000 and that’s where we are today. The scary thing is that this happens to be the state of consumer debt and savings today, which is only one aspect of the big picture. If you take a bird’s eye view of our nation’s financial situation — the economy as a whole, how our business and government sectors have been operating, the budget deficit — the future seems far from uplifting.

So when are we going to get our act together?

If you’re in debt, here are a few thoughts on how to manage your financial situation:

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