Components of Debt


The word “debt” is tossed around so much when finances are brought up that it can be difficult to understand exactly what debt is. Debt is made up of different components, such as loans or credit. Buying groceries or paying for gas are not components of debt. A mortgage, however, is considered a component of debt.


Mortgage debt is the biggest component of debt in the United States. According to the Federal Reserve, mortgage debt in the third quarter of 2010 totaled $13.9 trillion. Mortgage debt is also typically the largest component of debt in households. A healthy debt-to-income ratio is 36 percent or below, according to A mortgage payment will typically take up a large percentage of the debt-to-income ratio. For example, if a person makes $4,000 a month and has an $850 mortgage, $300 car loan and $200 per month in credit card payments, his debt-to-income ratio is 33 percent. His mortgage would take up 64 percent of the total debt.

Credit Cards

Credit card debt is the second largest component of debt in the United States. The total credit card debt in the United States in the third quarter of 2010 was $2.4 trillion, according to the Federal Reserve. Credit card debt can easily spiral out of control if people do not exercise financial discipline. Unlike mortgage debt, which comes at a fixed price and sometimes a fixed rate, credit card debt is completely self-inflicted and gets worse as a person accumulates more debt. The biggest reason for credit card debt is credit card interest rates, which were an average of 14.7 percent in the second quarter of 2010, according to

Auto Loans

Auto loans are another major component of debt. According to the Federal Reserve, the average amount financed for a car was $28,081 in the third quarter of 2010. Interest rates vary dramatically, and have an enormous effect on the final amount paid. For example, an auto loan amount of $28,000 at an interest rate of 5 percent for a term of 60 months costs the buyer $528 per month.

Tax Debt

Tax debt may not be as large of a component to debt as mortgages, credit cards and auto loans, but it’s still a component of debt. There are no hard recent figures as of 2011 on the average tax debt per family or person, but tax debt, like credit card debt, can spiral out of control fast. The IRS levies a 3 percent interest rate plus the federal short-term rate on anyone who does not pay their taxes on time.

Other Loans

All loans are considered components of debt, and there are a lot of different types of loans. For example, payday advance loans, home equity loans and personal loans all count as components of debt. Some loans, such as home equity loans, are secured and come with a low interest rate, while other loans, such as payday advance loans, are unsecured and come with a higher interest rate.

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