(TNND) — Americans’ household debt continued its steady climb to hit a record $18.8 trillion, according to the New York Fed’s quarterly report on household debt.
Total household debt increased by $18 billion, or 0.1%, in the first quarter of the year, the report released Tuesday showed.
Several subcategories of household debt – mortgages, auto loans, and home equity lines of credit – all increased last quarter.
Student loans and credit cards both fell. The drop in student loan balances was relatively small, and it’s typical for credit card balances to fall in the first quarter as consumers use tax refunds and New Year’s resolutions to pay down their debt.
Bankrate Principal Analyst Ted Rossman said some folks might be alarmed to see total household debt reach nearly $19 trillion.
But he said the debt-to-income ratio “is pretty low in the historical context.”
And he said the majority of debt reflected in the New York Fed’s report is actually good debt.
“Seventy percent is mortgage debt,” he said. “So, that’s good debt in the sense that you’re building equity, you’ve got a nice place to live, that you can make your own.”
The mortgage delinquency rate is 1%, which Rossman called “extraordinarily low.”
The delinquency rates for credit cards and student loans are 13% and 10%, respectively, he said.
But even student and credit card debt, as reflected in the report, isn’t necessarily bad, Rossman said.
Student debt can be necessary in the pursuit of higher earning power.
And the New York Fed report doesn’t distinguish between what’s paid in full and what’s not when it reports credit card balances, which now stand at $1.25 trillion.
Past Bankrate research has found that around half of credit card users carry interest-accruing debt from month to month.
“Where the rubber really meets the road is at the household level,” Rossman said. “If you’re someone who’s the transactor that’s using the card, paying it off right away, getting the airline miles, that’s actually a good thing for you personally and for the economy. If you’re stuck with a 20, or 25, or 30% interest rate, and you’re going to be in debt for the next however many years, that’s the problem.”
Rossman said the average credit card balance is around $6,700, citing TransUnion figures. If you make minimum payments towards that debt at the average interest rate, about 19.4%, you’ll be in debt for 18 years and end up paying more in interest than you charged in the first place, Rossman said.
“It’s so important to pay down credit card debt as quickly as you can,” he said. “Get the balance transfer (card), work with the reputable nonprofit credit counselor, take on the side hustle. This is one where you really need to pay a lot more than the minimum.”
Rossman said rising household debt reflects a growing economy. And he said credit card balances will grow as more people stop using cash.
Rossman called last quarter’s growth in household debt “measured” and “sustainable.”
“I feel like debt so often gets labeled this dirty word, but I would point out that some of this is reflective of a growing, consumer-driven economy,” Rossman said. “Some of it also is actually good debt, in the sense that owning a home can actually be a real wealth-builder over time.”
Mortgage balances have risen for 12 straight quarters and now stand at just over $13 trillion.
Much of the data from last quarter’s household debt report doesn’t reflect the recent spike in gas prices.
Rossman said higher gas prices could be a “wild card moving forward.”
“It does stand to reason that higher oil and gas prices could have effects, not just on what we put into our cars, but airline fares, we’re already seeing that, transporting goods from point A to point B,” he said. “A real canary in the coal mine there could be that producer price index that came out today and showed much higher jumps than expected. And that is what businesses are paying along the supply chain, and then later on that can filter into consumer prices.”
For now, consumers are still spending at a strong clip, despite pitiful consumer sentiment.
The so-called K-shaped economy could be keeping consumer spending strong. That’s a widening split between high- and low-income consumers, with wealthier households powering the economy.
Rossman also said people might actually have more spending power than they realize, considering the job market’s relative strength.
“It’s not all rosy,” he warned, noting that there are also folks taking on debt or dipping into savings just to make ends meet.
“If you only looked at consumer sentiment, you would think we’ve been in a deep recession for years now. The actual numbers have been climbing that wall of worry,” Rossman said. “There’s got to be a tipping point out there somewhere. We don’t quite know where it is, and we haven’t reached it yet.”