Consumer debt has risen dramatically in the second quarter of 2021. A recent report from the Federal Reserve Bank of New York's Center for Microeconomic Data shows that household debt increased by about $313 billion in Q2, bringing the total amount to a staggering $14.96 trillion. For comparison's sake, this is $812 billion higher than the figure at the end of 2019. So, what's to account for these jaw-dropping numbers? Here's why consumer debt is on the rise and how to pay off debt if you're currently facing large piles of unpaid bills.
Why COVID-19 is contributing to consumer debt
The consumer debt categories with the biggest jumps were mortgages and auto loans. Low mortgage interest rates, stimulus checks, and sky-high housing prices contributed to a swell in mortgage debt (+$282 billion). Meanwhile, an uptick in car sales, notably used-car sales—turns out most people would prefer not riding a crowded subway during a worldwide pandemic—helped propel auto loans (+$33 billion). Student loans also saw a lift (+$29 billion), even though many federal loans currently are in forbearance.
One surprising decline came in the form of credit card balances. Though balances saw an uptick in Q2, they still were $140 billion less than they were at the end of 2019. With nothing to do, nowhere to go (oh), credit card spending took a bit of a hiatus. Student loans also decreased to the tune of $14 billion.
Why you should care about your consumer debt amount
Debt, even for something important like a house or education, still is something that should be taken seriously. It's important to have a plan to pay down your debt so that late/missed payments don't cause it to rapidly increase on account of interest and fees. You'd be surprised at how quickly a debt spiral can make it difficult for you to get back on solid financial footing.
How to eliminate your debt
These steps can help you kick your debt to the curb once and for all.
Understand what you owe: The first thing you need to do is pick your head out of the sand and face the cold, hard debt facts. Gather your bill statements and see how much you actually owe. Blissful ignorance is not a debt strategy.
Create a budget: Next up, create a budget to help cut back on discretionary spending. Compare your post-tax income to your average monthly spend. If you're spending more than you're saving, see which expenses you can eliminate.
Select a debt repayment plan: Pick a debt repayment plan that you think you'll be able to stick to. Two popular options are the debt snowball and debt avalanche plans. With the debt snowball, you'll pay your debts off in order of smallest to largest. You'll continue to pay the minimum amounts on all your debts, but you'll put extra toward the smallest one. Once that's paid off, you'll focus on the second-smallest one, etc. With the debt avalanche, you'll still pay off your minimums, but you'll focus on putting extra toward the debt with the highest interest rate. Once that's paid off, you'll work on paying off the debt with the second-highest interest rate, etc.
Consumer debt is up post-pandemic, and your bills may have also seen a positive correlation. It's important to stay on top of your debts. By following the above tips, you'll be able to stay on track toward a healthy financial future.
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Original Source: Pandemic Aftermath: Why Consumer Debt is Rising
