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Finance

What is Household Debt?

By Carol Francois
Updated Feb 24, 2024
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Household debt is the total amount of money that the adults in the home owe to financial companies, including any mortgage. A debt is incurred when a request for a loan is approved. The funds from the loan are provided immediately, and a payment agreement is reached. The debtor will pay the creditor or financial institution a specific amount of money each month for a predefined period of time. Included in the amount to be paid to the creditor is interest, or the cost of borrowing the money.

The term household debt includes four types of debt: mortgages, revolving credit, fixed loans and asset based loans. All these items can be obtained from a variety of sourcing, ranging from a bank, loan company, credit card company and short term loan company. The total amount of household debt is the total amount outstanding from all these sources.

A mortgage is a loan for the purchase of a property, most commonly the primary residence or home. This item is usually the largest debt and has the longest term, ranging between five and forty years in length. The mortgage is secured by the residence or property. If the debtor does not pay the mortgage monthly payment, the financial institution can foreclose or take ownership of the home.

Revolving credit is any type of credit instrument where the payment is used to increase the amount of credit available. A credit card or line of credit is revolving credit. For example, a finance company issues a credit card with a $200 US Dollars (USD) limit. The debtor charges $200 USD in transactions, but pays this amount in full. The creditor now has $200 USD in available credit.

The debtor does not have a predefined payment amount, but a minimum payment required to cover double the interest amount each month. This type of household debt represents the most common type of debt. The majority of households have at least two lines of revolving credit.

A fixed loan is a specific amount of money with a scheduled repayment period. The principle amount is not made available as the loan is paid. Instead, the total amount owing is decreased by each payment. This type of loan typically has a lower interest rate than revolving credit.

A security backed loan includes any type of loan where an asset is used as the basis of the loan. Any type of vehicle, motorcycle or boat loan is an asset backed loan. A wider number of financial institutions, including some automobile manufacturers, provide these types of loans. If the debtor does not pay, the financial institution will repossess the asset.

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Discussion Comments

By mutsy — On Mar 02, 2011

Latte31 - I agree with what you are saying but sometimes it is hard not to pursue a dream that you have always had.

I wanted to add that the largest category of debt has to be the mortgage loan. In fact American families have about 48% of their income going into paying their mortgage along with homeowner taxes and insurance.

If you combine that with the average credit card debt and student loans it is easy to see how much debt the average American family is carrying.

The rule of thumb has always been to make sure that your home expense does not exceed 30% of your income.

Banks definitely do not want to see anything higher than 35% because at that rate you will have a higher likelihood of default.

Keeping your credit card balances at a manageable amount that you can even pay off at the end of every month will make a big difference in the amount of money you will have left over at the end of every month.

Household credit card debt is at least something that families have some control over.

By latte31 — On Mar 01, 2011

Comfyshoes - I totally agree but people look at the romantic notion of the degree and not realizing the cost of earning the degree.

Student loans unlike other debt is not dismissed in bankruptcy. In addition, private student loans offered by banks may charge whatever interest rate they want, so you have to be careful with those.

It is really sad to see people that pursue a field like medicine rack up about $200,000 in debt and then decide the field is not for them.

You really have to think about the long term implications of a degree and field of study. I know that this happens a lot with people that graduate from law school.

They find that the field it as not as interesting or rewarding as they thought it would be. This is why if you are interested in a field that requires a professional degree it is a great idea to volunteer for example, in a hospital if you are interested in becoming a doctor and try talking to actual doctors so you can see the pluses and minuses of the profession before you invest a fortune of your time and money.

By comfyshoes — On Feb 27, 2011

SurfNTurf - I do think that is a lot but according to Fin Aid.org student loan debt is much higher than credit card debt.

About $849 million dollars is owed on student loan debt while about $827 million is owed on credit card debt.

More students are finding themselves having to finance their own education because their parents are experiencing financial problems or may have lost their jobs.

I think that when you pursue a degree you really have to look at it as an investment and make the right choices. If you are looking to get into a field that does not pay well then you should consider an instate public university that is more cost effective.

I recently read about a student that pursued a PhD in education at a private school only to graduate with $100,000 in student loan debt with a job offer of $50,000.

It would have made more sense for her to work in the field and gather more experience and finance her education on a part time basis and look into public universities instead.

By surfNturf — On Feb 26, 2011

I recently read somewhere that the average credit card debt per household was $16,000 and that most families have about nine credit cards and four installment loans.

The installment loans would be a student loan, a mortgage, and a car loan. According to Experian the average credit card balance is $1,200 and the average credit score is 651.

I personally think that $16,000 is a lot of debt. I know that the average debt per household is much higher when you factor in the installment loans.

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