The debt that the average American household carries is closely monitored by financial experts. Household debt is an indicator of how the economy is doing and whether the country is about to enter another bubble. There are whispers that the amount of debt held per household is going up again.
The big fear is that debt will reach the same levels as the recession. This could cause mass defaults across the nation and make it nearly impossible to grow the economy again. There are many dangers to the dollar and this is one of them.
So is household debt creeping back up to recession level?
It’s difficult to determine
Household debt is the sum of everything owed by the average American household. It includes everything from student loan debt to credit card debt. In some areas the amount owed has gone up and in other areas it has actually decreased.
Balances on all types of debt have risen by 0.05 percent, which is less than $100 for every household. The amount people owe on student loans has gone down, whereas the amount of debt owed on credit cards has gone up by over 2 percent. The same goes for auto loans, where the average amount owed has also gone up by more than 2 percent.
People are spending again
What these figures don’t determine is whether the debt people have taken on is unsustainable. The amount people owe might have gone up, but there are no signs of people running into debt collection problems. In fact, growth in what people owe could actually be a positive sign.
One of the main problems the government had after the recession was getting people to spend again. Only spending is going to get the economy going. This is why they reduced interest rates. They wanted to encourage people to spend not save.
The problem is that with people suffering from stagnant wages and job losses they don’t necessarily have the money to spend. More credit card debt can show that people are spending, which shows that the economy is starting to move forward again.
The big purchases are happening
An increase in auto loan numbers is also a positive sign for the economy. Houses and cars are generally only bought during times of growth. This is because they aren’t always a necessity at that moment and they require large amounts of money to purchase.
With loan providers becoming more conservative than ever, the fact the amount people owe is going up shows that the country is more confident in the economy. High consumer confidence is always a good thing.
But it could be a repeat
These numbers can show that people are happy about what’s happening to the economy. They could also be signs that the economy has finally turned a corner. But further research is needed to establish whether it’s the sort of borrowing people can afford.
Some experts believe that the increase in borrowing is happening due to the fact people haven’t learned the lessons of the recession. Unfortunately, there’s no real way to know this beyond looking at the figures for defaulting and bankruptcy. These numbers are still not reliable enough to show that people haven’t learned from before, though.
So is the economy heading back to the recession?
Right now the amount of household debt does have the potential to head back to recession levels. But this shouldn’t cause people to panic. The difference between then and now is everything happened all at once in 2008. The average household was caught completely off guard.
They had no plan B and it caused many households to default. Now that isn’t necessarily the case because people have more stable jobs and there’s no great global crash in the cards.
On the contrary, the world economy is actually getting better. As people gain access to more funds it’s only natural to see people owing more. That’s not the sign of a problem, it’s a sign that the economy is back on its feet again.
Last word – should you worry about debt?
It’s easy to look at the warnings about borrowing and fret about your own circumstances. There’s such a thing as good borrowing and bad borrowing. If you have the capacity to easily make your repayments every month you have nothing to worry about.
Your level of risk always depends on how smart you are with your money. You don’t have to stay debt free, but you do need to make sure you know your capacity for taking on debt.
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