Growing 'debt divide' in the U.S. sees some pulling ahead as others fall further behind

By Zoe Han

Loans are getting more expensive, and many lower-income households lack the resources to get their debt under control

Some Americans are racking up debt even as others are paying theirs off, creating a debt divide among the U.S. population.

Among U.S. adults who have personal debts, more than 4 in 10 say the amount they currently owe is close to their lowest level ever, according to a recent survey by financial services company Northwestern Mutual, which polled over 2,700 people in February and March. But more than 3 in 10 are in a more precarious situation where their debt levels are the highest they've owed to date.

Bottom line: Although the average debt held by Americans is improving, that's not true for everyone, said Christian Mitchell, chief customer officer at Northwestern Mutual.

"More people feel like they're moving in the right direction than those who do not, but there's still a sizable universe of people carrying more debt than ever," Mitchell said in a statement.

The average amount of personal debt in the U.S., not including a mortgage, is $21,800. That's $8,000 less than it was in 2019 and also the lowest level since then, according to Northwestern Mutual. In 2023, 39% of Americans with personal debt said the amount they owe is under $5,000, the smallest share of the population with that level of debt in three years. Another 35% said their debt is between $5,001 and $25,000, which is the highest proportion of the population to say that in the last three years. In 2022, 26% said the same, while in 2021, the share was 28%.

Those who report that their debt level is close to its lowest point ever are more likely to be people with higher net worth -- those who earn more than $75,000 a year -- older people, people who describe themselves as disciplined planners and those who say they work with a financial adviser, said Reggie Joe, a wealth-management adviser at Northwestern Mutual. Those who are carrying debt that is close to their highest level ever are more likely to be younger and people who describe themselves as not disciplined planners, he said.

The events of recent years have contributed to this gap, Joe told MarketWatch.

"The last few years have included a number of things out of people's control. We went right from the pandemic, for example, into a period of high inflation and economic uncertainty," he noted. "What we're seeing is that those factors impact people differently. People with more savings -- such as boomers and high-net-worth individuals -- are likely to have been in a better position to weather those conditions and not rely on debt."Loans are getting more expensive

The inflation that started in the latter part of 2021 has pushed up prices for everything from groceries to rent. To combat that inflation, the Federal Reserve has raised its benchmark interest rate to a range of 5% to 5.25%.

As a result, it's getting more expensive to borrow money. Credit-card debt is the top source of personal debt, with 28% of survey participants saying it is their No. 1 source of debt, while 12% said car loans were their top source of debt. The cost of financing a new car was at an all-time high in the second quarter of 2023, with a historic share of new-car buyers -- 17.1% -- taking on a monthly payment of more than $1,000, according to automotive-research firm Edmunds' second-quarter report.

Credit-card debt remained at a record-high level of $986 million in the first quarter of 2023 -- the first time in more than 20 years that it did not dip as a result of seasonal variations, according to the New York Federal Reserve.

Student-debt repayment, meanwhile, has been paused since the early days of the pandemic but will resume in October. Student loans were the top source of debt for 5% of the survey participants overall and for 17% of members of Generation Z who have personal debts, for 10% of millennials and for 3% of Generation Xers.

Also read: Is now a good time to refinance your student loans? You could save money, but tread carefullyLower-income households lack the resources to tackle debt

While there are many factors that affect a person's financial circumstances -- with some of those factors being within their control and some not -- focusing on the factors that people can control could help them better navigate their finances, Joe said.

Some of the factors within our control are things like disciplined planning and working with an adviser, he added.

People working with a financial adviser were more likely to say they are carrying less debt or are close to their lowest debt level ever, with 52% of them saying that, according to the survey, compared with 38% of people who do not work with a financial adviser. About one-third of Americans have sought the help of a financial adviser, although 62% of all Americans say their financial planning needs improvement, according to a 2022 Northwestern Mutual survey.

People who earn $100,000 or more a year and college graduates are more likely to have consulted a paid financial adviser, according to the National Association of Plan Advisors.

People who called themselves disciplined financial planners were also more likely to say they were closer to their lowest level of debt.

Researchers and analysts have said that the U.S. states where people shoulder the greatest debt burden -- most of them in the South -- also often have lower average household incomes and less access to public safety-net benefits such as community financial support as compared with other states.

Also read:Credit-card debt burdens are worst in this state. Here's why

Although many U.S. households accumulated savings during the pandemic, low-income and middle-income adults are now dipping into their savings, according to a recent report from Morning Consult.

"For the past 25 months, [consumer-price index] inflation outpaced growth in average hourly earnings, meaning that Americans' incomes were falling on an inflation-adjusted basis. Negative real-wage growth acted as a headwind to consumer spending and prompted many Americans to draw down on their savings and take on additional credit," the report said.

Low-income individuals increasingly report juggling bills, and the share who were late on utility payments or rent rose for the second straight month in June, according to Propel, an app that aims to help low-income Americans improve their financial health. In June, an all-time high of 60% of surveyed users of Propel reported not having the household essentials they typically need, according to Propel.

"It's been so hard," one Florida Propel user said in the survey. "I had no vehicle to go to food pantries. For over three months, I've barely eaten so my kids can. I go without dinners often and am in debt with friends and family just for food."

Emma Ockerman contributed.

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07-16-23 0908ET

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