Household debt is not always a bad thing. Having credit and using it responsibly is a part of personal fiscal responsibility. Credit allows you to make big-ticket purchases -- houses, cars, education -- without having to first save up the total amount needed. But buying on credit means having to pay off that debt. Taking on too much household debt can greatly impact your credit rating and prevent you from buying a new home, leasing a new car or prevent your qualification for a personal loan or even a department store credit card. According to the Federal Reserve Bank of New York, household debt was estimated to be $11.53 trillion for American households as of December 2011. Understanding the key facts about household debt can help you take the reins on your financial future and create a more stable, healthy financial situation.
Definition of Household Debt
Household debt is a consumer’s total debt within a household. For married couples, it is the total debt owed between both parties. Consumer debts that fall under this heading can include credit cards, student loans, auto loans, leases, mortgages, personal loans, asset-based loans and business loans.
Defaulting on Debts
A consumer defaults on a loan when he has not paid on a debt obligation. Default status will vary depending on the type of debt and terms of the agreement. For some creditors, default means failure to pay interest and principal payments when they are due, while others consider default to occur after two missed payments. Regardless, defaulting on a debt obligation shows the creditor that the consumer is unable or unwilling to pay the financial obligation; thus forcing the creditor to collect through other means.
Calculating Household Debt
You can calculate your household debt rather easily. First, gather all creditor account statements for all household members. This includes all revolving credit and fixed loans. Revolving credit, such as a credit card, is a credit line that fluctuates each month based on the balance and interest of the account. Revolving credit does not have to paid in full each month, but the payment amount and interest rate can change depending on the terms listed in the credit agreement. A fixed loan carries the same interest rate and payment amount each month -- such as a car payment. Fixed loans do have to be paid off each month to maintain your credit status. Write down the creditor and each balance, add the balances together, and the total is your household debt.
When you want to obtain new credit, you need to look at not only your credit score and history, but your debt-to-income ratio. This ratio compares your household debt to your household income. When considering an application for a mortgage, for example, the lender will want both the household debt and income for all parties on the mortgage loan. This ratio will determine how much the consumers can borrow – or if they can borrow at all. Lenders split the debt-to-income ratio into two parts: front-end and back-end ratios. Front-end ratios estimate how much of the household’s gross income will go toward the mortgage payment – including interest, taxes and insurance. The back-end ratio determines how much of the consumers' household income goes toward debt of any kind. For most lenders, household debt payments cannot exceed 36 percent of the consumers' income. Some lenders use much stricter standards while others allow room for higher ratios.
- Federal Reserve: Household Debt Service and Financial Obligations Ratios
- New York Federal Reserve: Quarterly Report on Household Debt and Credit
- International Monetary Fund: Dealing with Household Debt
- BankRate: How Much House Can You Buy?
- Wells Fargo. "Calculate Your Debt-to-Income Ratio." Accessed Mar. 31, 2020.
- Board of Governors of the Federal Reserve System. "Consumer Credit - G.19." Accessed Mar. 31, 2020.
- Consumer Financial Protection Bureau. "Debt-to-Income Ratio Calculator," Page 2. Accessed Mar. 31, 2020.
Shailynn Krow began writing professionally in 2002. She has contributed articles on food, weddings, travel, human resources/management and parenting to numerous online and offline publications. Krow holds a Bachelor of Science in psychology from the University of California, Los Angeles and an Associate of Science in pastry arts from the International Culinary Institute of America.