Americans Are Paying Off Debt at Record Rates: Is That Good or Bad?

It seems safe to assume that for most of us, not being in debt is a good thing. After all, debt, though it can be a useful tool at times, limits our options about how to employ our financial resources. Especially with consumer debt like credit cards, payments on the debt must be made every month until the balance is satisfied. And for too many Americans, reliance on credit cards leads to a difficult cycle of increasing balances owed, rising minimum payments, and higher interest rates.

However, there’s another side to the story of debt, and that is the perspective of the lending institutions that derive revenue from the payments made by consumers. Most of the nation’s largest financial institutions offer credit cards for one simple reason: they are lucrative sources of interest income. That is why, in a typical month, most of us receive so many offers from credit card companies with headlines like “You’re pre-approved”; “Zero interest on balance transfers”; and similar enticements.

But there’s a problem. According to a recent article in the Wall Street Journal, US consumers are paying off credit card debt at the fastest rate in years, and major banks and other financial institutions are concerned. Largely in response to the pandemic, worried consumers have been shedding credit-card debt at a brisk pace. Outstanding balances on credit cards fell almost 20% during 2020, from about $912 billion to about $750 billion. Additionally, revolving balances on credit card accounts as a percentage of available credit are at their lowest level since 2009, according to credit-reporting firm Equifax. As a result, credit card issuers are developing new strategies designed to prop up demand, including more lenient underwriting standards and aggressive new marketing campaigns.

Should anyone other than the credit card companies be worried about the current, apparently financially responsible trend toward paying off consumer debt? Aren’t we better off if we owe less in monthly payments? Well, again, it depends on your perspective. Debt, under the proper circumstances, can contribute to overall economic growth. Careful use of debt (sometimes called “leverage”) can enable small businesses to expand into more profitable markets, pay for needed upgrades to plants and equipment, and even permit the purchase of a larger home or a needed remodel (which, by the way, provides income for real estate professionals, builders, retailers, and others—another economic benefit). Even credit-card debt, if managed well, can boost significant economic segments like retail sales.

Considered in this light, debt—whether consumer debt or indebtedness incurred for business or commercial purposes—might be viewed as a “Goldilocks” factor: it needs to be in the “just right” zone, neither growing too fast nor shrinking too rapidly. The important thing for most consumers is to not allow debt to become the tail wagging the dog. In fact, this is important for nations, too, which is why some are expressing caution over the huge debt bill the federal government has racked up in its efforts to stimulate the economy during the COVID-19 pandemic.

Managing debt strategically should be an important part of any wealth management plan, and our job as professional, fiduciary wealth advisors is to help our clients develop a plan that leads to greater financial security and the accomplishment of their most important life goals. If we can answer questions or provide informed perspectives to help you gain a better understanding of your financial strategy, please contact us.

Buen Camino!