The average American household has total debt of more than $90,000, which includes households that live debt free. The average household with debt owes more than $130,000.
This debt burden is costing the average household more than $6,600 in interest per year — about 9% of the average income. Here’s what the average American household owes, and what you should do if your debts have gotten too high.
How much do we owe, and to whom do we owe it?
According to NerdWallet’s 2015 American Household Credit Card Debt Study, the average U.S household with debt owes $130,922 — including credit cards, mortgages, auto loans, student loans, and other forms of debt. Here’s a breakdown of the debts of the average American household as of the fourth quarter of 2015.
Keep in mind that these numbers are referring to entire households, not individuals. The average student-loan debt for a household is $48,172, while the average for an individual is about $29,000. Many households have two or more members with student-loan debt, which is why the numbers here may be different than what you’re seeing elsewhere.
Good debt vs. bad debt
Not all debt is bad. For instance, mortgage debt is considered to be the best kind of debt to have, as long as it’s a reasonable amount. Not only are interest rates so low that you should be able to earn better returns by investing your money instead of paying for your home in cash, but mortgage debt is backed by an asset that should increase in value over time.
Certain other kinds of debt aren’t necessarily bad to have. Student-loan debt generally comes with reasonable interest rates. Repayment is much more flexible than with most other types of debt, and if the debt helped you get a degree, it can pay for itself many times over. An auto loan is another example of potentially good debt, as long as your interest rate is reasonably low.
Having a mix of debts like these can help you build your credit score. Ten percent of the FICO-scoring formula is based on your mix of credit accounts. In other words, lenders want to see if you can be responsible with several kinds of credit accounts, not just one.
On the other hand, credit-card debt and other high-interest debts are usually considered bad. There are a few exceptions: for instance, if you have a 0% introductory APR on a credit card. For the most part, however, credit-card debt is excessively expensive, even if you have a high FICO score. The interest you’ll pay on a credit card generally outweighs any benefits — credit score or otherwise — of carrying the debt. In fact, the $15,762 in average household credit-card debt generates $2,630 in interest charges per year – an average APR of 16.7%.
Focus on getting rid of your bad debt first
If you have credit-card debt, or other high-interest debt (let’s say with a rate of 10% or greater), that should be your No. 1 priority. I know it can be tempting to double up on your mortgage or student loan payment if you have extra money, but it’s silly to do so if you have higher-interest debt draining your wallet.
The obvious solution is to pay more on your credit cards. Making just the minimum payments can leave you in debt for decades, and even a little extra per month can translate to big savings. However, if you’re already paying as much as you can, there are still some things you can do.
- If your credit is good, consider applying for a balance transfer credit card with a 0% APR. The Citi Simplicity card has an industry-best 21-month introductory 0% period, and the Chase Slate has a 15-month 0% period plus no balance transfer fee, a rarity in the credit-card industry.
- Another option is a debt-consolidation loan, either from a bank, or a peer-to-peer lender like Lending Club or Prosper. Your interest rate probably won’t be as low as, say, a car loan, but it’s likely to be significantly better than your credit card’s rate.
- Many people don’t realize, but you can call your credit card company and ask them to lower your interest rate if you’re struggling to pay down your debt. The worst they can say is no, and you may be surprised at how much they’re willing to work with you. After all, it costs them a lot less to shave a few points off your interest rate than it does to send an account to collection.
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If you’re fortunate enough to not have credit card debt, by all means go ahead and pay down your other debts if you want. Just make sure you do it in the right order — highest interest first.