The Definition of Household Debt
Debt burdens carried by households are important from both an individual and a national perspective. Consumer debt is often used as an indicator for the overall state of the economy. According to Robert G. Murphy in an article for AllBusiness, an "increasing share of income (is) devoted to paying interest on debt." Debt-burdened households risk defaulting on payments and restrict their consumer spending, which have ripple effects through many industries.
Other People Are Reading
-
Definition of a Household
-
For financial purposes the definition of household refers to all individuals living at the same residence and working as one financial unit, such as a family. If, for example, four separate individuals are sharing a house such as college students functioning only as roommates, typically each person would be a separate household for the purposes of obtaining loans. Household debt refers to the total combined debt of all individuals at one residence functioning as a single financial unit.
Consumer Debt
-
The debt acquired by individuals for personal use or that of the household, not including a home mortgage, is consumer debt. Consumer debt is a key factor in household debt and primarily consists of auto loans, credit card balances and payday loans. MSN Money notes that "about 43 percent of American families spend more than they earn each year." That overspending becomes debt on credit cards and payday loans.
-
Debt Payments
-
Debt service ratio (DSR) is a comparison between personal net income and the debt payment obligations of the members of a household. The Federal Reserve Board considers household debt as "estimated required payments on outstanding mortgage and consumer debt." Debt-service ratios are most often used to analyze a consumer's financial stability for loans and in calculating the net worth of an individual or household.
Financial Obligations
-
The financial obligations ratio (FOR) is another means of determining the total debt owed by a household. The Federal Reserve Board cites that the FOR includes leases on autos, "rental payments on tenant-occupied property, homeowners' insurance, and property tax payments" that are also included in calculations of debt-service ratios for determining household debt.
Overall Debt
-
The Federal Reserve's statistical data on consumer credit published July 8, 2010, reveals that the combined total debt owed by Americans for the year 2009 was nearly $2.5 trillion. IndexCreditCards, a website providing information regarding credit cards, notes that the average credit card debt per household is $7,394 for the year in 2010, a decrease from 2009. It is suspected that the 2008 to 2009 economic crisis has been a leading factor. Consumers have not wanted to assume additional debt, card companies are more selective and many former credit card customers no longer have their privileges.
-
References
Resources
- Photo Credit debt defined image by Christopher Walker from Fotolia.com
