How Consumer Debt Rising Impacts Household Finances

Table of Contents

1. What is Consumer Debt and How Is It Accrued?

2. What are the Overall Impacts of Consumer Debt?

3. How Does Consumer Debt Impact Interest Rates?

4. How Can High Amounts of Consumer Debt Impact Your Daily Finances?

5. What Budgeting Challenges Can High Consumer Debt Cause?

6. Strategies for Lowering Consumer Debt

7. What are Some Tips for Managing Finances?

Rising debt rates have been on the minds of Americans since the advent of the credit card. 

What kinds of debt are good, and what kinds of debt are bad? Should you close lines of credit you’re not using? Should you lower your debt or increase your savings? There are plenty of questions that you might have about consumer debt, not just yours, but how it impacts everything around you. 

The rise of consumer debt can have far-reaching consequences, and that can seem like a lot to take in. But that’s why we’re here. This article is designed to help explain the impacts of rising consumer debt nationally and personally, as well as give you practical tips on managing your finances during times of high debt.

What is Consumer Debt and How Is It Accrued?

Your first question is likely to be, what is included in consumer debt? Consumer debt encompasses personal debts that you incur as a result of purchasing goods and services for you or your household. Your consumer debt includes things like:

• Credit card debt
• Student loan debt
• Auto Loan debt
• Mortgage debt
• Payday loans

Consumer debt is broken down into two major categories: There is revolving debt, which may have a variable payment amount and is paid down monthly, like credit card debt. Non-revolving debt is when you are given an upfront lump sum payment, which you pay down in fixed amounts over time. These would include your auto or student loan, as well as your mortgage.

Even if you own your own business, debts incurred as a result of your business, such as the purchase of inventory, won’t count toward your consumer debt. Nor will any debt incurred through government operations impact your consumer debt.

You can accrue consumer debt in several ways, and it has become an everyday occurrence. You may not even think about it. How often do you swipe or tap your credit card? Those everyday purchases can increase your consumer debt if you’re not diligent about paying off your credit card balance each month.

What are the Overall Impacts of Consumer Debt?

Rising consumer debts can impact more than just your finances. You may have heard the term “inflation” thrown around in the news and have an understanding that inflation is bad, but do you know what it means? 

Inflation in the economy refers to the increase in the price of goods and services. For example, you may have noticed that your favorite pasta has gone up a few cents or a dollar. That’s inflation. Inflation can be caused by many things, and consumer debt is one of them.

When you, the consumer, are more concerned about paying down your debt, then you aren’t likely spending money on luxuries or indulgences – and that’s totally fine! However, the companies that make your favorite products still need to pay to make them, and if they are getting less demand from consumers, they may need to increase their prices to cover production costs.

If you expand that to a national scale, it is easy to see how rising consumer debt can impact inflation. The more consumers are concerned about paying down their debts, like student loans and mortgages, the less they’re buying. The less they’re buying, the more you may end up paying at the checkout counter.

How Does Consumer Debt Impact Interest Rates?

Another term that you may have heard tossed around is “interest,” and now is the time for you to get interested! Interest is a charge that is put on borrowed money and ensures that the lender can get a percentage back if a consumer misses a payment or cannot pay off their current debt.  

Interest is often expressed as a percentage. When you borrow money from a lender, you’ll be expected to pay it back as well as an extra percentage of the amount you borrowed. You can often choose between a fixed rate and a variable rate. A fixed-rate will remain the same for your entire payment term, while a variable rate will adjust as the economy changes.

Widespread consumer debts can increase interest rates. Interest rates typically increase when there is a higher risk of borrowing. If a lender believes there is a risk to repayment, then higher interest rates will go into effect to ensure that they can reclaim some of the money they lent out. 

The more consumer debt there is, the more risk a lender is likely to see when loaning our money, leading to an overall increase in interest rate – and more that you’re likely to pay over the course of your borrowing.

How Can High Amounts of Consumer Debt Impact Your Daily Finances?

Consumer debt can pile up very easily. There is credit card debt, often with variable interest rates that shift with the movement of the economy. You probably have to commute to work, and if you don’t have reliable public transit, that means you need a car, which means auto loan debt. Maybe you own your own home, and that means a mortgage debt. As these items add up, your income may not go as far as originally planned. 

It can be beneficial to have a manageable amount of debt, as on-time payments of your consumer debts can help build your credit score. If you are diligent about paying off your credit cards and make your car payments on time and in full, your credit score will slowly but steadily increase.

However, if you start to lose your grip on your consumer debt, then it can harm your credit score. Missing payments, defaulting on a loan, or declaring bankruptcy can negatively impact your credit score and make it harder to build it back up again.

If your credit score is negatively impacted, then it could impact your ability to borrow in the future. Many lenders will look at your credit score to assess your ability and likelihood to pay them back. You may also face borrowing limitations in the future if you have a high rate of consumer debt.

What Budgeting Challenges Can High Consumer Debt Cause?

One of the biggest challenges you may face if you have high consumer debt is your daily budget. When you have multiple payments to keep track of, it can be difficult to allocate funds for them all. On top of that, you can’t just stop paying for your daily necessities, like food and bills, so how do you manage all of it?

One way you can start to wrangle your debt is to find thebest budgeting system that works for you. Budgeting isn’t a one-size-fits-all process, so you’ll need to find the system that works best for you. But the most important aspect is to find a budget that you can stick to.

A budget calculator can help you put your finances in perspective so you can start working towards your financial goals. Sometimes, seeing the numbers all laid out together can make the picture easier to put together.

Strategies for Lowering Consumer Debt

If you’re looking to lower your consumer debt, there are a couple of different strategies to accomplish it, and it all comes down to what works best for you. 

Maybe you’ll like the debt snowball method. This has you starting with the smallest debts first. Take whatever amount you can spare and put it toward your smallest balance; then, when that debt is paid off, take the amount you were using to pay that balance and put it toward your next smallest balance. This is called the snowball method, as each paid balance can snowball into the next to help motivate you.

Or maybe you’d prefer the debt avalanche. This involves taking that same extra amount, like the snowball method, and putting it toward the debt with the highest interest. This helps you pay less over the time of your loan by wiping out the debt that will cost you more over time.

What are Some Tips for Managing Finances?

There are other methods you can use to help lower your consumer debt. You can consider debt consolidation. This involves selling your debts to one firm. They will pay your current lenders in full, and then you will be paying a singular entity rather than having to keep up with multiple payments to multiple agencies.

Life happens, so another important aspect of managing your finances in a high-debt scenario is having an emergency fund. This can help ensure that in the case of an emergency, you still have the ability to pay your debts on time. 

Addition Financial Is Here to Support You In Times Of High Debt

Rising consumer debt can seem overwhelming, but the team at Addition Financial is here to help. We have plenty of online resources that you can use to help lower or even eliminate your debt, and you can always come in for an in-person consultation at your local branch for a personalized look at your finances.

Now is a great time to get motivated to start lowering your consumer debt, and tips you need to put that plan into action!