Unpaid expenses, unexpected bills, and income gap — this has been the financial rollercoaster many find themselves in 2023.
And as everyday expenses soar, many Americans are reaching their breaking points. From credit cards to car loans, total household debt has surpassed $16 trillion nationwide.
In this blog, we’ll dig deep into various types of consumer debt and how people are falling behind on bills in 2023.
Household Debt on Steady Climb
Debt levels among American households have been steadily rising for years. According to the latest data from the Federal Reserve, total household debt balances reached a new high of $17.06 trillion in the second quarter of 2023. While managing debt is a part of everyday life for many, record-breaking levels raise serious concerns about financial stability and well-being across the country.
A deeper look at the numbers paints an even more troubling picture. Total balances are rising not just because of inflation adjustments but due to substantive growth in unsecured consumer debt like credit cards as well as secured loans such as auto financing. This analysis will examine debt trends broken down by type, explore some key drivers fueling increased borrowing, and discuss the impacts of high and growing debt levels on individuals and families.
The Credit Card Debt Crisis
The credit card debt has seen particularly brisk growth over the past year. In Q2 2023 alone, total credit card balances swelled by $45 billion to hit $1.03 trillion. This series represents a substantial increase over pre-pandemic levels and signals many households are relying more heavily on plastic to make ends meet. Average annual percentage rates (APRs) for all credit cards currently sit at 21.19%, while the average APR on cards actively accruing interest is an even steeper 22.77%.
Beyond the headline numbers, deeper financial stresses are reflected in credit card behavior. An alarming 43% of users report missing at least one payment in the last five years, with 14% doing so in 2023 alone. Nearly a quarter say they go further into debt each month, carrying balances forward. One-third have resorted to consolidating one credit card’s debt onto another card, charging higher interest. These trends paint a picture of households under increasing strain to manage mounting balances and costs.
Lingering Medical Debt
Medical debt, though decreasing, remains a substantial burden for millions. According to the Consumer Financial Protection Bureau, 8.2 million fewer Americans reported medical debt on credit reports from early 2020 through early 2022. This positive change largely stems from expanded health insurance coverage made possible through the expansion of Affordable Care Act and Medicaid.
Though medical debt has decreased somewhat due to expanded insurance coverage, out-of-pocket costs still concern many. High deductibles and worries over health premiums can deter individuals from seeking necessary treatment. As a result, around one-third of adults still worry about affording monthly premiums, and nearly half worry about deductibles and other out-of-pocket costs, according to a recent KFF poll. And this has led to one-third of adults skipping or delaying recommended treatment due to cost concerns at some point.
The high price of healthcare also prevents some from accessing prescribed medications. Research shows about a quarter of adults or their family members have not filled a prescription, cut pills, or skipped medication doses in the past year due to cost.
Even the people with coverage face the burden of uncovered costs, which contributes to financial hardship for millions. When treatment is delayed, or prescriptions go unfilled, health conditions may deteriorate or chronic issues arise, leading to more serious — and more expensive — problems down the road.
Resuming Student Loans
After over three years on pause due to the COVID-19 pandemic, student loan borrowers will restart making monthly payments beginning in October 2023. This will be an adjustment for the Americans with outstanding federal student debt totaling $1.57 trillion.
While payments will resume in October, borrowers may not all have the same due date. Loan servicers, private companies contracted by the Department of Education, will provide individual billing statements and repayment schedules. By law, these must be distributed to borrowers at least 21 days before the first payment is due.
The resumption of payments after a prolonged pause is likely to strain household budgets, primarily as inflation drives up other living costs. Careful planning will be needed to either budget repayment or enroll in an income-driven plan to keep monthly obligations affordable.
So, what is driving this rising tide of debt at the household level?
There are several interrelated factors at play. To start, inflation has been running at decades-high levels over the past year, with food and fuel prices rising the most. When necessities become more expensive, people have less flexibility in their monthly budgets to pay down existing balances.
At the same time, the economic uncertainty of the pandemic era still lingers for many. Lingering impacts like widespread long COVID, disruptions in childcare and schooling, and remote work adjustments have made it difficult for some households to return to pre-crisis normalcy. Job losses and reduced incomes led to hardship that increased reliance on credit cards and loans to maintain spending levels.
And the consequences of rising debt levels across these major categories extend beyond dollar figures. High and growing balances are linked to increased financial insecurity, including difficulty paying regular monthly bills and saving for emergencies. The stress of debt is also taking a toll on mental health, with anxiety and depression on the rise. Perhaps most concerning is the long-term impact on credit profiles; missed payments can linger for years on reports and lower credit scores, reducing future access to affordable loans when needed.
With total household debt largely exceeding the GDP, addressing the root causes fueling over-reliance on credit is critical for individual and economic well-being. While responsible use of debt has a role, policy solutions are needed to make healthcare and other necessities more affordable and stabilize household budgets. And such changes need to be implemented from the base.
For example, providing multiple repayment options with flexibility in the amount and time could persuade and help debtors to repay their loans and avoid delinquency — and help creditors to recover their debt.
Creditors need to proactively implement such policies and steps to ensure a win-win situation for all.