What Is Consumer Debt?

Debt weighs heavily on the minds and wallets of people across the country. The average American has racked up $104,215 of debt across mortgages, auto loans, student loans and credit cards. 

Mortgages make up the majority of this debt. HELOCs and auto loans take the second and third spots. While credit card debt ranks in fourth place, it still majorly impacts consumers. The typical American has swiped their way to $6,501 in credit card debt on average. 

How did all these people get here — and how do they get out?

Defining Consumer Debt

Consumer debt is broken down into two main categories: revolving and installment debt. Let’s take a closer look at these categories, their definitions and examples of each. 

1. Revolving Debt

The revolving side of consumer debt involves someone having a credit agreement with a lender that sets a credit limit. Many people see this as how much you can spend. However, it’s more like how much you can borrow within a certain period of time. So, if the credit limit on your shiny new credit card is $5,800 a month, that’s how much you can borrow. Then you pay it back. 

Some examples of revolving credit include:

• Credit cards: A credit card is what most people think of with consumer debt. With a credit card, a borrower can make purchases up to the set credit limit. Interest is applied to the unpaid balance. 
• Store cards: A specific retailer issues this card. A cashier at your favorite department store may have offered you one of these before, dangling discounts galore along with it. As with traditional credit cards, you’re on the hook to pay back what you charge on it. Then interest is applied to the unpaid balance. 
• Lines of credit: A bank or other financial institution can issue a line of credit with a predetermined limit. This setup allows borrowers to take funds as they need them up to said limit. Then, once again, interest applies. Some lines are unsecured, and others are secured through collateral. 

These are all harmless — and even good to have — as long as you realize you can accrue debt quickly. This is especially true if your lender has higher interest rates. While a good credit score can help with this, the current average credit card interest rate is a whopping 27.62%. 

Making the minimum payment sounds great, until the interest kicks in. The more often you do this, the quicker you’ll fall into debt, meaning it’s not a best practice for reducing debt. But if it’s all you can do, it’s still better than paying nothing.  

2. Installment Debt

For installment debt, an entity lends you a lump sum of money, which you repay over a set period of time. The installment includes part of the principal, or the original amount of money you borrowed, plus interest. 

The following are common types of installment debt:

• Mortgages: People use these loans to finance a real estate purchase. There are fixed interest rates for the life of the loan or adjustable rates based on market conditions. Terms are typically 15 or 30 years. Installments include the principal and interest. 
• Auto loans: People in need of a new set of wheels take out auto loans to pay for it. The length of the loan varies from two to seven years on average, and the installments include the principal and interest. People often call this the car note.
• Student loans: Student loans finance higher education expenses. You can get these from private lenders as well as the federal government. 
• Personal loans: These are similar to an auto loan or a mortgage. People take them out for many reasons, like to pay for weddings or home renovations. However, it’s an unsecured loan because there is no collateral to back it. So whether or not you get one can depend on your credit history, and it may have high interest rates. 
• Home equity loans: A home equity loan allows someone to borrow money against the equity they’ve built in their home. Equity refers to the property’s current market value and the outstanding mortgage balance. You can use it to finance a variety of things, including home renovations or and unexpected expenses. A home equity loan usually has fixed interest rates and repayment terms. 

One of the most important things to understand is whether your installment debt has fixed or variable rates. This significantly impacts your payments. Fixed rates often are higher, but they don’t change. Variable rates are at the mercy of market conditions. So, you could start with a lower rate, then one day get hit with a much higher one.

A Word on Medical Debt

Wondering where medical debt falls among what is considered consumer debt? The answer is: It depends. If your medical debt has an assigned payment, then it’s installment debt. Otherwise, it doesn’t fall into either category. If you don’t pay the provider within a certain period of time and the debt goes to collections, that also means it ends up on your credit report and can affect your credit score. There are federal efforts in the works to change that, but in the meantime, you can check with your hospital or doctor’s office to see if they have the flexibility to offer a payment plan. 

Consumer Debt Considerations

The total household debt in the United States is at $17.69 trillion, according to the Federal Reserve Bank of New York. Yes, that’s a trillion with a “T.” 

Why do so many Americans go into debt? Everyone’s situation is different, but some common factors are:

• Credit is easy to access. Just about every retailer offers a store credit card, and offers for the latest credit card promotion come through the mail every day. They often have minimal requirements that are easy to meet if you need cash.
• Interest rates are high. Interest adds up fast. Not paying your balance in full each month means interest applies, and it’s easy for things to snowball.  
• On that note, minimum payments often do very little to alleviate debt. Just paying what’s required makes it harder to get out of debt in the long run. 
• The economy plays a role, too. A struggling economy and job market often cause people to rely on credit cards and loans to cover expenses. 
• Spending habits. If you’re spending more than you make, you’re going to go into debt.

How To Reduce Consumer Debt

If you’re dealing with consumer debt, there are some strategies you can take to reduce or eliminate it:

• Reduce expenses: Go through what you’re paying for each month and cut what you don’t need. You can save more than you think by canceling unnecessary subscriptions and services. Identify services you can reduce by negotiating a new plan or changing provider (e.g., cell phone, Wi-Fi, streaming channels, etc.)
• Budget: Track your spending and income down to the penny. Prioritize paying off debt as much as possible, especially high-interest debt. Our list of the best budgeting apps can get you started.
• Consolidate: You can often consolidate debts from multiple sources into one loan with a reduced interest rate or more generous terms. 
• Increase income: This one isn’t always easy, but it’s worth it to seek out a higher paying job, a raise, passive sources of income or starting a side hustle.

Credit counseling can help, too. Discover how a credit counselor can assist you in reducing your consumer debt.