The U.S. economy achieved the impossibly difficult task of achieving a soft landing in October, meaning inflation was curbed without damaging economic growth or triggering a recession. While the economy has improved notably over the past two years, consumer prices have not recovered from the surging inflation that peaked in June 2022.
Diminished buying power has forced many Americans to explore side hustles and rely on credit cards to make ends meet. However, carrying an unmanageable credit balance every month can quickly spiral and have severe implications for consumer debt.
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The Federal Reserve Bank recently released its Q3 2024 Household Debt report, and the results mirror consumer prices: household debt is increasing as the cost of living remains untenably high.
Although the debt-to-income ratio is falling to 2019 levels, financial stress remains high as Americans struggle to balance competing expenses.
Poor financial health — high levels of debt in particular — can even translate into poor physical health due to heightened stress. While after-tax incomes are increasing, they may not be enough to counteract inflation and rising delinquencies.
Household debt is steadily increasing, and so is financial stress
The total US household debt reached $17.94 Trillion in Q3, up nearly $150 billion since Q2 2024. The debt-income ratio — how much of a person’s salary is allocated to paying off debt — has dropped to 82%, down from 86% pre-Covid. It was a staggering 120% during the Great Recession.
However, credit card balances increased by $24 billion, and auto loans rose by $18 million, a sign that households may be struggling to pay down non-housing debt. Economists see consistent increases in delinquency levels as an indicator of financial stress.
A man is seen contemplating his credit card finances.
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A 2023 study published in the National Library of Medicine found that higher financial stress is associated with psychological distress, a trend most pronounced among unmarried, unemployed, and lower-income households.Â
Financial stress can impact work performance and career growth, as demonstrated by a new WalletHub study outlining the impact of debt on mental and physical health. The results note that 51% of Americans are struggling with credit card debt, and 48% of all respondents believe their debt is impacting their mental health.
Nearly half of respondents anticipate their debt increasing over the next year. With such severe ramifications, debt management strategies have become increasingly important to reduce impacts on financial and mental well-being.
Debt management strategies
Most personal finance experts agree there are two main approaches to paying off debt: tackling the debt with the highest interest rate first or focusing on the debts with the smallest balances first to make quick wins.
Related: Dave Ramsey bluntly speaks on interest rates and mortgages
Each person’s approach to debt management may differ depending on their financial situation. However, there are a few essentials to keep in mind:
Understand the difference between good debt and bad debt. Good debt is usually low-interest and can help increase your income, such as student loans, mortgage loans, or business loans. Bad debt is typically high-interest and used for personal purchases such as clothing or furniture.
Limit your credit card reliance. Only charge what you know you can pay off each month to avoid high-interest fees and to avoid carrying a balance from month to month. Keeping balances below 20% of your credit limit and always paying bills on time are good financial habits that help your credit score.
Explore debt consolidation strategies with an advisor. Credit card balance transfers and debt consolidation programs that combine credit card debt under one single loan can reduce the hassle of multiple monthly payments and often allow borrowers to secure a lower interest rate than their credit card debt. Home Equity Line of Credit (HELOC) and 401(k) loans are other options, though they should be discussed with a financial advisor.
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