Household debt hits an all-time high. Is that a bad thing?

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U.S. household debt reached $12.7 trillion in the first quarter of 2017. That’s a record high, topping the pre-recession level in 2008.

Your immediate reaction might be concern over anything passing financial crisis levels, but it’s more complicated than that. An abundance of mortgages, many made to poorly qualified borrowers, helped sink the economy a decade ago. That’s not what’s happening now.

One way to look at the latest debt level: Americans have returned their finances to a better balance as the economy has healed, helped in part by an improving job market and attention to debt.

“Many whose credit was damaged during the economic crisis have restored their financial health to the level where they can qualify for mortgage loans, credit cards, auto financing and other types of credit,” says Bruce McClary with the National Foundation for Credit Counseling.

First, the numbers:

household-debt-power-up-graph

It’s not an even comparison

Let’s offer a few cautionary notes when comparing the debt totals. A few important things have happened since we hit the previous record level in 2008:

  • The population has risen.
  • The economy has expanded.
  • The number of households in the U.S. has increased.

So, the level of debt per person (or per capita) is not at a record. Also, the numbers aren’t adjusted for inflation. Greg McBride, CFA, Bankrate’s chief financial analyst, says it’s not an even comparison. “On an apples-to-apples basis, household debt has not exceeded the pre-recession high,” he says. Translation: Don’t expect a sequel to “The Big Short” anytime soon.

Within this data, the percentage of loans 90 or more days past due is little changed from the previous quarter. The report notes that 11 percent of student loans haven’t had a payment in three months or more. That understates the real problem. The actual number could be twice as high because the loans are covered by grace periods, or deferments, allowing repayment at a later date.

Student debt is a major concern

At more than $1.3 trillion, student loan debt concerns me the most. The burden is rising as state governments provide less funding to their colleges and universities. Students and their families are paying the difference, often taking on thousands of dollars in debt. Many graduates carrying that debt are delaying other purchases, like homes.

This seems unsustainable, for the nation and for future students. The new figures indicate that student loan debt is rising at an annual rate of $83 billion. When it comes to funding education, the government is letting us down.

If you’re saddled with student loan debt, check out these tips for paying it off fast.

Not all debt is created equal

View debt as a financial tool. You can use a hammer to build a house, but use it improperly and you’ll whack your thumb.

Bankrate’s McBride says to think of types of debt in separate terms, like good debt and bad debt.

“Bad debt is anything used to pay for consumption items, such as credit card debt. Good debt is used to create increasing value over time, such as student loan debt that facilitates higher lifetime earnings or a mortgage that buys a home which appreciates in value over time,” McBride says.

Even this concept has its limits. One lesson of the housing crisis is that home values don’t always rise. The downturn left many homeowners in houses where the mortgage balance was higher than the home’s value.

If you’re ready for a mortgage, compare rates on Bankrate to find the right loan for you.

Bottom line: Have a repayment plan

When managing debt or taking out a new loan, a smart repayment plan is a must.

“If borrowing for a home or a college education, treat the loan as an investment and take all possible steps to ensure a positive return. Credit cards and small loans are tools of convenience and often come with higher interest rates, so it is important to limit their use to situations where you can quickly repay them,” McClary says.

If you’re carrying debt, follow these tips to pay it off once and for all. If you have a balance on your credit cards, consider a balance transfer card to consolidate all of your credit debt onto one low-rate card. And join Money Masters, our exclusive Facebook group, for personalized advice from McBride and other Bankrate experts.

Follow me on Twitter: @Hamrickisms

Mark Hamrick

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