How Americans' Love Affair with Debt Has Grown

We all know that Americans have more debt now than they did decades ago. In our consumer-driven culture, buying new gadgets, clothes, and other "must-have" items has been made quite easy with credit cards. The college-for-all culture has also encouraged many young people go take on thousands of dollars in student loans. And of course, there was the housing bubble. But how much more debt do Americans have now than they have historically? The numbers are pretty incredible.

It's hard to find an all-in number for the debt Americans hold, but the Federal Reserve provides a monthly tally of non-real estate consumer debt. So this doesn't include mortgages, home equity loans, federal and municipal debt, or corporate debt, but it's a start.

In order to compare apples to apples, you need to take population and inflation into account. That's also an imperfect science, since exact statistics are hard to come by. But the following graph is a good approximation. It shows non-real estate consumer debt per capita for non-institutional civilians over the age of 16 (using Bureau of Labor Statistics data), adjusted for inflation (using Consumer Price Index data from BLS):

consumer debt per capita 2010-07 indiviglio.png

This chart should be startling. It shows that total debt has increased from around $1,186 per person in 1948 to $10,168 in 2010. And remember, that's using 2010 dollars -- and it doesn't include real estate debt either like mortgages or home equity loans. This debt includes credit cards, auto loans, student loans, personal loans, and other non-real estate consumer debt.

Perhaps an even more interesting observation is the rise of credit card debt. They account for most of the "revolving" debt shown with the green line. It was virtually non-existent until 1970. Now Americans average $3,480 in credit card debt per capita. Since just 1980, that's an increase of 285%.

There are a few things likely driving the incredible consumer debt growth. One was already mentioned: student loans. High student loan balances did not used to be nearly as common. But as high schoolers are more pressured to attend college and tuition fees increase far faster than inflation, so are student loans. This is fairly evident through the purple line for nonrevolving debt. It was pretty steady between $4,000 and $5,000 per capita from the early 1960s until the early 1990s, but then it took off after that.

Another cause is the popularity of credit cards. There used to be a time when only rich people could get them. But now the robust credit score industry has made banks and finance companies more comfortable giving credit cards to a much broader population of Americans. Of course, that means higher balances, as many middle- and lower-class Americans who run up credit card debt can't pay it off as easily as the upper-class cardholders who used to make up most of the market.

You also likely notice the steep decline in debt since the financial crisis struck. This was mostly due to less revolving debt, for two reasons. First, banks have become stricter about credit card access and balance limits. This is due to both new regulation and fear of losses as the financial crisis takes a toll on Americans' credit profiles. Second, consumers have been working to reduce their debt as the economy struggles. They want to establish greater fiscal stability in case the economic difficulty persists.

What we're seeing here is a correction. Credit can't simply grow indefinitely, but must find a healthy equilibrium. It had clearly been extended too far prior to the crisis, and both banks and consumers are now pulling back. But wherever it finally settles will still likely be far greater than the amount of credit per capita prior to 1990 -- unless we are in a drastic and prolonged period of shrinking credit.