Life without some kind of debt is nearly impossible. Still, there are “good” kinds of debt and “bad” kinds of debt, and timing of taking on debt matters too.
As the US economy emerges from the extended pandemic a number of factors affecting debt and borrowing are at play:
- Jobs – job openings, job creation and job RE-creation
- Ability of small businesses to pay workers amidst longer-term uncertainty
- The presence of Inflation for all kinds of popular products and services – meaning consumers are being forced to pay more, often unexpectedly
- Changing demographics and geographies around home ownership…
- …Creating increases in home prices
- Super low interest rates
- Plain old desire to spend after year-long restrictions on nearly everything!
These factors and more have led to more borrowing in certain areas and less borrowing in other areas plus changes in how people borrow.
Traditional sources of consumer debt such as credit cards declined in 2020 and for most of 2021. Smartly, lots of people aggressively paid down their credit card balances realizing that kind of debt is not handy in a pandemic.
- Credit card debt is in the category of “bad” debt for obvious reasons. Data shows that credit card use is strong although the carrying of credit card balances decreased markedly in the past year. This trend is a victory for consumers and their cash flow, although a negative for credit card companies (not feeling sorry for them!).
Mortgage debt, which could be categorized as “good” debt (IF the overall size of the mortgage and payments are kept in check) has largely increased due to super-low interest rates – which did tick up from the bottom but are still historically low. This trend will likely continue.
Car/Truck/SUV debt has recently picked up due to multiple factors including a jump in car prices plus lower borrowing standards. This trend is uncertain. Auto debt can be unavoidable but is in the middle of “good” and “bad” debt.
Inflation in prices for travel and entertainment has definitely set in (could be temporary – or “transitory” in Fed-speak) which will lead to a pick-up in credit card debt. The healthiest thing that could happen in this area is that card balances are paid off promptly. Holding credit card balances to pay for discretionary items can get “bad” real fast.
Most of this information is not rocket science. However, the less obvious and positive thing to note is that debt is mostly a factor that can be controlled. During this time of super-low interest rates, minimizing and paying off or paying down debt – as well as evaluating “good” and “bad” debt – can pay dividends for a lifetime.