What Is Personal Consumer Debt?

Personal consumer debt is a phrase often heard in the news, but what does it mean? It is very important in the realm of personal finance, and can affect a number of areas beyond just debt.

Identification

Personal consumer debt is the amount of debt held on personal credit cards, loans and other common financial obligations. Personal consumer debt often carries high interest rates, which become increasingly expensive as the balances owed reach high amounts.

Significance

Personal consumer debt drives the U.S. economy. Increased consumption translates to higher consumer debt as individuals borrow money to purchase more, driving demand to manufacture more of the items consumers are willing to buy. Personal consumer debt is considered good for the economy, but can be very detrimental to the individual.

Effects

Personal consumer debt has a substantial effect on a person's finances. Debt is a large part of an individual's credit score, which can determine interest rates on important investments such as mortgages and loans. Having a high amount of personal consumer debt can translate to paying thousands of dollars more in interest payments.

Prevention/Solution

Personal consumer debt can be avoided or reduced by practicing smart spending habits. Paying with cash or a debit card, instead of a credit card, requires you to first ensure you have the money necessary to buy the item. The convenience of a credit card is dangerous, since it allows you to buy things with money you do not necessarily have. Avoiding credit cards can help you avoid debt.

Size

According to the Federal Reserve Bank, the size of U.S. personal consumer debt stands at almost $16 trillion as of September 17, 2009.

References

• Federal Reserve Bank statistics