“The average American has $52,940 worth of debt across mortgage loans, home equity lines of credit, auto loans, credit card debt, student loan debt, and other debts like personal loans.”

From the Federal Reserve Bank of New York's Household Debt and Credit report, 2021

The joy of living debt free, or perhaps oblivious to debt.

I lived for at least a decade oblivious to the debt I was accumulating. It was all neatly swept away each time I refinanced my home mortgage or took out an equity line of credit. Even with several years hindsight, I don’t think I bought or did anything extravagant, and I did put a good hunk of the borrowed money back into updating my home (that’s still called “good debt”). I also kept believing for way too long that I would be hired full-time by the college where I was an adjunct instructor, or one of the myriad other jobs I applied for, so I wouldn’t need to siphon the equity in my home to pay my growing mortgage and bills.

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The irony is that I was borrowing exactly the way the lending industry and its accomplices encouraged—from the equity in your home—if you were lucky enough to own one. In the early 2000’s housing prices were climbing on their way to a bubble-bursting recession, and homeowners were encouraged to “manage” their debt by paying it off through their equity. And that is exactly what I did, many times over, until the housing bubble burst and I, and millions of other homeowners, were out of equity, and eventually out of a home.

This method for borrowing money has it’s good points: the interest rate for a refinance or a “cash out” refinance (where you are handed some of your home’s equity and then could use that to pay down your other debt, or vacation in Tahiti) is much lower than credit card or personal loan interest rates. It also saves you from the mortifying tasks of asking to borrow money from family or friends, or declaring bankruptcy.

And borrowing from your home’s equity is even considered “good debt” provided you allocate it for improvements to your home or pay off other higher interest debt, rather than take that aforementioned trip to Tahiti. The difference between good debt and bad debt, according to a 2020 article from CNBC is “… what the debt does for you — and it should always be more than what you do for the debt.”

Good debt is defined as loans to buy a home, get an education or start a business, because there is a foreseeable return on investment. Conversely, bad debt is accrued when spending on credit to accumulate material possessions with no long term return on the money spent, except the momentary flush of excitement one feels when purchasing (or wearing) something extravagant (See above CNBC article).

Statistics gathered by the Federal Reserve Bank of New York and reported in Business Insider, show that by far, the highest debt that individuals and families carry is their mortgage, and not surprisingly, student loan debt comes in second.

Here's a breakdown of the average amount of each type of debt according to the Federal Reserve Bank of New York's Household Debt and Credit report from the first quarter of 2021: 

Debt Type Average Balance

Mortgage debt $36,730

Home equity lines of credit $1,210

Auto loan $5,000

Credit card debt $2,780

Student loan debt $5,730

Other debt (personal loans, payday loans, etc.) $1,490

Chart from Business Insider

According to these statistics, most of the debt we carry is characterized as “good debt”, but like with most opposites, the line between good and bad can be quite blurred. Did you receive a quality education and are you reaping the benefits in both your understanding of the world and a satisfying high paying career? Do you absolutely love your home and is it gaining considerable value over time?

What does this mean for all good, debt-carrying Americans today? The stimulus payments and extra unemployment benefits allowed many of us to pay down our debt; in fact, we paid off a record breaking $83 billion in credit card debt in 2020. But with skyrocketing prices in the last 14 months or so, and wages not keeping pace, Americans are accumulating debt again. My finances are following this exact pattern.

You would think that lenders and the government regulating them would learn from the near-crippling recession we suffered just a dozen years ago, caused in part, by soaring home prices and excessive (and encouraged) use of the increasing equity in your home. But in its usual profit-first way, lenders want you to pile up that “good debt” yet again during this housing bubble.

Don’t let that equity go to waste! Use it to pay off the credit card debt you’ve accumulated because of soaring prices on consumer goods:

How are your finances doing these days? Have you taken on new debt in the last year or so? Leave your comments here.

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