Biggest Cause of Debt: The American Dream

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Americans owe a total of over $11.4 trillion in household debt (according to statistics from the Federal Reserve Bank of New York.)

That's a big number. But what does it really mean? What are the causes of our household debts? What kind of debts do Americans have, and which are the biggest debts?

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Here is a breakdown of some of the biggest causes of U.S. household debt:

Mortgages and Home Equity Loans

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As of August 2012, Americans had $8.7 trillion in mortgages and home equity loans. One of the recent trends is that Americans have been carrying less mortgage debt, in part due to the fallout from the housing bust and financial crisis of 2008. According to a report from Equifax cited in this article, mortgage and home equity debt levels fell 3.1% during the first quarter of 2013. The reasons? One is a “bad” reason: many people have defaulted on their mortgages, going into foreclosure or selling their homes via short sale, which leads to banks writing off massive amounts of un-repayable mortgage debt. Another reason is more encouraging: consumers have been aggressively paying down their mortgages. Many people are reluctant to owe a lot of money on their houses, and they want to pay off their housing debt more quickly. This is a new trend in the American housing market that is much different than the mindset of the housing bubble years, when people were encouraged to borrow as much as possible to buy the biggest house they could afford.

Student Loans

The next largest portion of Americans’ household debt is student loans, totaling over $914 billion as of August 2012. Student loans are one of the fastest growing forms of personal debt in America, as the cost of college continues to rise faster than inflation. Although most people consider student loan debt to be a “good debt” because it helps people obtain a college degree that can lead to a better paying job, too much student loan debt can be risky for your financial future – especially since student loan debt is a non-dischargeable debt that never go away, even if you declare bankruptcy. 

Auto Loans

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Another large source of personal debt in America is auto loans, totaling approximately $750 billion as of August 2012. During the first few years after the housing crisis and Great Recession, there was a decline in car loans and many people could not get approved for a loan to buy a new car, especially with less-than-perfect credit. But according to new research on the car loan market, sub-prime car loans are becoming more common again, almost to the same level as in 2007, and some car lenders are even offering 72-month (6 year) car loans.

Credit Card Debt

Credit Card debt made up $672 billion worth of America’s total household debt as of August 2012. Although Americans are known for “shopping till you drop” and putting purchases on their credit cards, the recent trend has been for Americans to borrow less with credit cards and get better about paying their bills on time. According to this article from CBS News, the average credit card debt per borrower fell 1.7% to $4,878 in the first quarter of 2013 compared to a year earlier, and the rate of credit card payments at least 90 days overdue fell to 0.69%.

More Sources of Debt

Other sources of personal debt include personal loans and lines of credit to banks, loans between family and friends, retail financing on new purchases of furniture and appliances, and various other types of financial arrangements. According to NPR, Americans had a total of $312 billion in other types of personal debt.

Getting out of debt can be difficult and requires significant life changes, but it helps to know that we’re not alone. Many of our fellow Americans are dealing with high levels of personal debt from a variety of sources, whether it’s a big mortgage that they are struggling to afford, or a car loan, or a pile of credit card debt, or all of the above. Whatever your personal debt levels, try to focus on what is within your control, try to earn more money, spend less, and live a simpler lifestyle, and be grateful that you have the power to make a difference in achieving a life free from debt.