Economic definitions are always ambiguous, but most experts agree we have finally stepped out from the shadow of the 2008 financial crisis, which was disastrous for businesses and consumers alike.
However, despite strong signals that our economy is recovering—such as record-low levels of unemployment and a strong stock market—there’s one economic trend that seems to keep getting worse.
According to Nerd Wallet, the average household has about $132,000 of debt, the highest level for that figure—ever. The average amount of debt in this country, though it varies from year to year, is consistently climbing upward. So why is this rise in debt so bad for the economy, and why does it continue to grow?
Negative Consequences of Consumer Debt
First, remember that debt isn’t wholly a bad thing. Some debts, such as mortgages and student loans, lead to positive changes or may even be necessary to make basic life requirements more affordable. Still, there are some strong negative consequences of consumer debt that can make it a potentially crippling problem:
- Restricted spending. For starters, consumers with high amounts of debt don’t have as much free cash to spend as their debt-free counterparts. Because they’re bogged down with monthly payments, they’re less able to put money back into the economy, which leads to stifled economic growth. They may also be less able to invest in further education for themselves or their children, leading to reduced opportunities and income in the future.
- Bankruptcy and lack of recovery. If your debt grows out of your control as a consumer, and you find yourself unable to pay the amounts you owe, one of your last resorts is bankruptcy. As Rowdy Williams explains, there are different types of bankruptcy depending on what situation you’re in, but all of them leave a brutal and lasting mark on your credit, which can significantly compromise your future financial life.
- Compound interest. Investopedia explains compound interest perfectly: recurring interest rates apply to interest earned on your original principal, resulting in exponential growth over time. For investments, this is a good thing, but for debts, it means you’ll likely end up paying more than you originally borrowed in the first place.
Why Consumer Debt Keeps Increasing
So why are we stuck with these consequences? Why does average consumer debt keep increasing?
- Credit card availability. Most consumer debt, aside from mortgages, comes from credit cards. Credit cards are ridiculously easy for any adult to obtain, and they’re easy to use. They also carry high interest rates, which begin accumulating immediately and can quickly make your debt spiral out of control. Because it’s so easy to pick up a credit card and start spending, millions of people wind up in debt before they realize what’s happening.
- Cost of education. It’s also worth noting that student debt has risen dramatically in this country. Even when adjusting for inflation, the cost of a college education has grown consistently almost every year for the past several decades. To make matters worse, it’s more important than ever to have a college education if you want to seek well-paying employment; this combination leads millions deep into debt every year.
- Capitalistic values. The roots of our cultural values are complex, as Psychology Today notes, but it’s no secret that our capitalistic, individualistic society puts pressure on not only building wealth, but displaying it. High income levels and accumulated possessions are seen as valuable and “better” than low income levels and a lack of possessions. This drives people to spend more than they can afford, especially when it comes to things like housing, vehicles, and gifts.
- Lack of education in personal finance. Personal finance isn’t taught regularly in U.S. primary or secondary schools. Learning about compound interest, how the economy works, the importance of saving, and the dangers of credit cards is important, yet we don’t have a formal structure in place to teach these values to our children and young adults.
- The psychology of spending. It’s also worth noting that consumers tend to spend more with digital currency, and with debit and credit cards, than they do with regular cash. We’re gradually transitioning to a society that rarely uses cash—which is driving up consumer spending.
There’s no single root cause for the increase in consumer debt in this country, and the rising trend is unlikely to end anytime soon. The more aware you are of the motivating factors for this growth, and the better informed you are about the restrictions debt imposes on your life, the better you’ll be able to navigate this economic climate and build a positive financial foundation for your life.