NCPA - National Center for Policy Analysis

Household Debt Levels Reach Scary Peak

October 9, 2002

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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