NCPA - Daily Policy Digest - Household Debt Levels Reach Scary Peak

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Household Debt Levels Reach Scary Peak

Debt is an American tradition. Economic historians point out that the pilgrims paid for their passage on the installment plan -- and it took many of them years to pay for their passage.

But now, household debt has exploded to more than 100 percent of disposable personal income -- believed to be the highest level ever. In other words, the average household owes more than it earns every year, after taxes.

Wealthy households are piling on debt the fastest -- largely because of increased borrowing against the value of their homes.

Debt for the top fifth of U.S. households hit 120 percent of disposable income in the first quarter -- up from 100 percent in 1995 according to Federal Reserve calculations.

The debt burden for the bottom four-fifths of households also grew -- but at a more modest rate.

It rose to 80 percent of income this year -- from 70 percent in 1995 according to the Federal Reserve.

The bright news is that income levels have continued to rise and interest rates are low -- meaning many households are able to manage their higher debt loads.

But that could change if interest rates increase.

Most people don't experience debt problems as a result of borrowing too much. They get into trouble when they suffer a hit to their income that makes it difficult to service their debt.

Source: Jon Hilsenrath, Michelle Higgins and Ruth Simon, "Debt Problems Hit Even the Wealthy," Wall Street Journal, October 9, 2002.

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