September 14, 2023

Household Debt

Household Debt
By: Liz Strait, PhD


Recently, total household debt, credit card delinquencies, and variable interest rates have all increased. As the U.S. experiences a credit crunch, more households are facing financial strain and distress. The financial health of the population is deteriorating, and it isn’t limited to particular segments. As a Financial Professional (FP), it is important to understand how interest rates, inflation, and a credit crunch can adversely impact your clients. While it may be tempting to assume that the negative effects of these trends are limited to subprime borrowers, delinquent accounts, or low-income earners, this would be an unwise assumption. All of an FP’s clients could be impacted—and to varying degrees—by changes in the credit landscape. For this reason, it is essential for FPs to understand how behavioral biases can magnify the impact of these variables and lead clients to deviate from their financial plans.



Total Household Debt

Total household debt is the outstanding balance of all loans a household may carry—mortgage, revolving home equity, auto, credit card, student, and other. Tracking household debt is one indicator of financial well-being for Americans and the health of the economy as a whole. Increased household debt can be a signal of consumer confidence—increased borrowing suggests individuals believe the economy will remain strong. Total household debt is directly impacted by the interest rate—higher interest rates are meant to dissuade borrowing and reduce total debt, while lower ones have the opposite effect. Examining the composition of household debt can also provide insights into lending products that are becoming increasingly expensive or relied upon by households. As Figure 1 shows, the composition of household debt hasn’t changed much in the last five years, suggesting that if total debt is increasing, it is because all products are becoming more expensive. This makes sense given the interest rate hikes that have been occurring since March 2022.

Figure 1

Source: Federal Reserve Board of New York & Equifax Credit Panel Data (August 2023).

Note: Dollar amounts have not been inflation adjusted since the goal was to show composition (proportion), and adjustment will not affect this.

In terms of understanding the true financial well-being of a U.S. household, however, it is also important to understand how income relates to total household debt. If debt is rising and incomes are not, more Americans will fall into financial distress—and this is not just limited to lower-income households. The most relied upon indicator of general financial health is the debt-to-income ratio (DTI). This is defined as the total monthly (or annual) amount of household debt divided by net monthly (or annual) income.1 The maximum DTI allowed to qualify for a mortgage usually hovers around 43%.2 This means that as DTI increases, more consumers will be priced out of credit markets. DTI can increase when there is inflation and credit becomes increasingly expensive, while incomes remain stable or grow below the rate of inflation, which has been the case since April 2022.3 Overall, American households are paying more for their debt each month and the number of households being priced out of credit markets is increasing as a result.

Figure 2

Source: Federal Reserve Board of New York & Equifax Credit Panel Data (August 2023).

Notes: (1) All dollar amounts have been adjusted for inflation (via the CPI Index) to July 2023 dollars using the Bureau of Labor Statistics (BLS) inflation calculator (accessible here: (2)Total household debt is the sum of outstanding debt balances for mortgages, revolving home equity (HELOC), auto loans, credit cards, student loans, and other.

When we look at the poverty rate in the U.S. (Figure 3), this indicator of financial well-being is also grim. The poverty rate, after governmental assistance (both cash and other forms), is currently at 14%—having risen sharply when COVID-19-related assistance ended. While still lower than other years, it is at the highest is has been since 2016. As inflation continues to erode real incomes, it is likely the poverty rate will continue to grow. It is also not only the lowest-income earners who will be adversely affected. Interestingly, income inequality (the difference in pre-tax income between the highest-earning and lowest-earning 10% of U.S. households) has actually decreased. This is because the decline in median household incomes has been borne primarily by households at the top and middle of the income distribution.4

Figure 3

Source: Center on Poverty and Social Policy at Columbia University.

Notes: (1) The poverty rate shown is the Supplemental Poverty Measure (SPM). The U.S. Census measures both the Official Poverty Measure (OPM), which is based on cash resources, and the SPM, which includes both cash and non-cash benefits and subtracts necessary expenses (e.g., taxes, medical expenses). The SPM is generally considered a more comprehensive measure because it accounts for modern forms of income, benefits, expenses, and regional cost-of-living differences.5 (2) The dotted line is the historical rate including government assistance. For example, during the COVID-19 pandemic, this rate was inclusive of any COVID-19 financial relief. The difference between the solid line and this line can be interpreted as the reduction in the poverty rate attributable to resources from government assistance programs.


Variable Interest Rates

As total household debt increases, we are also seeing increased delinquencies across credit products. As shown below, the percent of accounts moving into delinquency has increased for credit cards, auto loans, and mortgages since the end of 2021. These delinquencies suggest that households are increasingly unable to meet their debt obligations. In previous posts I have discussed the auto loan, mortgage, and student loan side of borrowing and household resources. In this post I’m going to focus on credit card debt—a loan type that has variable interest rates. While mortgages and auto loans can have variable rates, they are a much smaller portion of the borrowing landscape within those categories. Credit cards are the inverse of that—most credit cards have variable APRs, while fixed-rate cards are rather rare. While HELOCs also mostly have variable rates, they are much less widely available than credit cards (though HELOC originations have been on the rise).

Figure 4

Source: Federal Reserve Board of New York & Equifax Credit Panel Data (August 2023).

Notes: (1) New delinquencies are any accounts 30 or more days delinquent. (2) Dollar amounts have not been inflation-adjusted since the goal was to show percentage of total accounts and adjustment will not affect this.

The variable nature of credit card rates makes any individual holding them financially vulnerable if rates increase and they carry an outstanding balance. Even if a consumer stops spending on a given card, if that card has a balance and rates increase, their debt obligation necessarily increases. The increasing cost of credit card debt will affect almost half of credit card holders in the US.6 As of 2021, 84% of Americans had at least one credit card.7 That means over 131 million Americans have an outstanding credit card balance and are thus facing increasingly expensive credit card debt as inflation and interest rates continue to climb.


While new credit card delinquencies are nowhere near where they were during the fallout from the 2008 financial crisis, they have been growing at an increasing rate (demonstrated by the steep slope for both early and serious new delinquencies from mid-2022 to mid-2023 shown in Figure 5). Increasing delinquencies don’t just affect the individuals who are delinquent, but financial institutions and the broader economy as well. As more accounts become past due, the stability of financial institutions can be challenged. This is because delinquencies can lead to more write-offs, which amount to direct financial losses; require higher reserves which could be used for other activities; reduce profitability; and result in stricter credit standards, making it more difficult for all borrowers to access credit.

Figure 5

Source: Federal Reserve Board of New York & Equifax Credit Panel Data (August 2023).

Notes:(1) New early delinquencies are accounts that have just moved into being 30 days delinquent. New serious delinquencies are accounts that have moved from early delinquency into being delinquent for 60 or 90 days (though definitions of serious delinquency can be lender-dependent). (2) Dollar amounts have not been inflation-adjusted since the goal was to show percentage of total accounts and adjustment will not affect this.

As interest rates on existing accounts increase, there is no reason to expect this sharp incline in credit card delinquencies to plateau or decrease. Currently, the rate sits at 20.68%—this is over four percentage points higher than it has been in almost thirty years. Even more relevant is the fact that the rate has jumped over 6 percentage points since Q4 2021 when it was 14.51%. So, in a matter of 18 months, monthly payments have increased by approximately 143% (at a minimum) for the average credit card holder.8 This is a substantial amount. Of course, this was what was supposed to happen with increased interest rates being used to combat inflation—the cost of borrowing increases, serving to decrease spending and curb inflation as a result.

Figure 6

Source: Federal Reserve Economic Data (FRED), St. Louis Federal Reserve Board.

Note: Interest rates shown are those for existing credit card accounts, not new accounts. These interest rates are charged based on existing balances.


Pricing Out Subprime Borrowers

A major theme from the squeeze on household finances, is that subprime borrowers are being forced out of the credit market. This is happening with both auto and home loans. And it is happening with credit card lending as well. This tightening of lending standards will obviously reduce subprime borrowers’ access to traditional credit products: mortgages, auto loans, credit cards, and personal loans. Importantly, the effect of this credit crunch is not contained to subprime borrowers—everyone stands to lose when these borrowers are restricted from accessing credit. Specifically, it can reduce lenders’ profitability—subprime borrowers are high-risk, but that means they are also high reward. If this revenue stream was removed, lenders would have to find alternative avenues for maintaining profitability. This could result in layoffs, reduced credit availability overall, the introduction of additional fees, and, while less likely, higher borrowing rates across credit score categories. Reduced access can also impact the economy by stifling economic growth—an inability to get credit can reduce entrepreneurial activity, homeownership, and other drivers of the economy. At a societal level, pricing subprime borrowers out of the credit market can increase income inequality and reduce economic mobility.


As an FP, you will likely see clients overly worried and/or not worried enough about the cost of borrowing and inflation. Some clients may not be concerned about their monthly finances or household debt, while others will worry that a credit crisis is imminent. Both responses require careful consideration. For this reason, it can be important to understand what motivates these emotional (or unemotional) responses to a household budget squeeze.


Money Illusion

A behavioral bias that is likely having one of the larger effects is something called the Money Illusion. This is a term that was coined by Irving Fisher, an economist, over 100 years ago. It describes the tendency for people to think about money in nominal rather than real terms. Put differently, the effect of inflation (or deflation) is ignored and people rely on the face value of money rather than its purchasing power. In the behavioral finance realm, Shafir, Diamond, & Tversky (1997) empirically established the Money Illusion’s existence.

To illustrate, consider Figure 7 below. Both charts show total household debt for the past 20 years. The chart on the left is the same as Figure 2 above. The chart on the right is the same data, but it has not been adjusted for inflation (which is how the NY Fed releases the data). These two charts tell very different stories. The chart on the left shows total household debt has been steadily increasing since Q2 2013, but that it is not anywhere near the highest it has been in the time period (total household debt was higher from Q4 2006 – Q1 2010). The chart on the right suggests that household debt has been increasing since Q3 2014 and has been growing at a rapidly increasing rate since Q2 2021. It also suggests that current total household debt is significantly higher than it has been at any other time from 2003 - 2023. This is the Money Illusion in action.


Figure 7

Source: Federal Reserve Board of New York & Equifax Credit Panel Data (August 2023).

Notes: (1) Dollar amounts for the chart on the left have been adjusted for inflation (via the CPI Index) to July 2023 dollars using the Bureau of Labor Statistics (BLS) inflation calculator (accessible here: The chart on the right has not been inflation-adjusted. (2)Total household debt is the sum of outstanding debt balances for mortgages, revolving home equity (HELOC), auto loans, credit cards, student loans, and other.

Clients falling victim to the Money Illusion could have multiple reactions. For those who are following the news and seeing headlines like, “Consumer Debt Passes $17 Trillion for the First Time…”9 or “Credit Card Debt Hits New Peak…”10 they may see the unadjusted numbers and panic—thinking these trends suggest a financial crisis or recession are imminent. This can cause unnecessary anxiety and a potential desire to shift investments to safer options, even if the time horizon of their financial plans extends beyond the immediate future.


At the same time, clients could be focused on nominal dollars when it comes to income/wages or investment outcomes, without regard for the real value of those dollars. This can result in clients spending or investing beyond their means because they do not realize their income does not stretch as far as it did a year ago. It can also lead clients to prefer safer investments such as high-yield cash reserves without realizing that the interest rate being advertised is nominal. For example, a client could push for a high-yield cash account that has an APY of 4.75% because they expect a return of 4.75% interest. However, the APY does not account for the eroding effects of inflation. In August 2023, the inflation rate was 3.7%.11 This means the real interest rate on a 4.75% APY cash account is 1.01% (i.e., the effective increase in purchasing power is 1.01% a year).12 The real return may be far less appealing to clients than the nominal return.


To counter the Money Illusion, it is important to demonstrate the difference between nominal and real dollars—awareness can go a long way for this cognitive bias. It is particularly important to do this for any financial time-series data (e.g., total household debt over time) and for investment returns. Illustrating this difference via graphs like the one above can help individuals visualize just how misleading the bias can be. For clients more inclined towards numerical information, going through the data or the calculation of real interest rates can also help debias the Money Illusion.


When interacting with clients, always express financial data in real terms (i.e., communicate the real interest rate, the real expected return, real income, etc.). This will avoid the cognitive illusion altogether. Conduct a scenario analysis with your clients to show projected real returns over longer time horizons dependent on a low, moderate, or high inflation rate. This can show the true impact of inflation over time and help clients better prepare financially. Finally, you can also challenge your clients to practice adjusting amounts for inflation in their daily lives—this practice will make thinking in real (vs. nominal) terms more intuitive and, thus, less effortful.



With inflation and the increased interest rates it precipitated, many Americans are experiencing a household budget squeeze. Increased interest rates have increased variable rates on several debt products—particularly credit cards. As the cost of debt increases, more delinquencies are imminent. Delinquencies can undermine the stability of financial institutions and the economy as the credit market contracts. As an FP, it is imperative to understand these trends as well as the emotional and cognitive biases they may elicit.


To Summarize

  • Overall financial well-being in the U.S. is decreasing as total household debt increases and median household incomes fall.

  • Credit card delinquencies are increasing at a higher rate as variable APRs increase the cost of credit card debt.

  • Subprime borrowers are being restricted from access to credit, which can reduce lender profitability and stifle economic growth.


  • Many clients will struggle with the Money Illusion—focusing on nominal dollars rather than real dollars.

          o This can lead to increased panic around financial trends (such as total household debt and total credit card debt).

          o  Many clients will consider investments based on nominal returns instead of real returns.

          o  Clients may not properly plan for their financial future because they disregard the eroding effects of inflation.


  • To help with the Money Illusion:

          o  Educate and make clients aware of what it is.

          o  Visualize the difference between nominal and real values to make it more tangible.

          o  Always express financial amounts/data in real terms.

          o   Encourage clients to practice adjusting for inflation to make thinking in real terms more intuitive.


Atlas Point can help you identify which of your clients are most prone to behavioral blind spots and emotional responses. You can assess clients for several biases via our signature Financial VirtuesTM survey. You can try our Financial VirtuesTM survey here: Financial Virtues Survey. You can also identify which clients may fall victim to the Money Illusion by using our Money Illusion Pulse Check.

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End Notes

[1] For example, if monthly household debt is $5,000 and monthly net income is $10,000, that household’s DTI is 50%.

[2] Fay, Bill.“Demographics of Debt.”, 21 Jul 2023,

[3] For example, the inflation rate for 2022 was 8.0% according to the Bureau of Labor Statistics (BLS). Median household income (after taxes) has been declining since 2019. This means that inflation is outpacing income growth—as a result, the purchasing power of a household has been decreasing rapidly. See also: Historical Inflation Rates: 1914-2023 accessible here:

[4] Casselman, Ben, and Lydia DePillis. “Poverty Rate Soared in 2022 as Aid Ended and Prices Rose.” The New York Times, 12 Sep 2023,

[5] See: See also:

[6] According to Bankrate, 47% of American credit card holders carry a balance month-to-month. See: Thangavelu, Poonkulali. “More Cardholders Carrying Credit Card Balances In High Rate Environment.” Bankrate, 9 Aug 2023,

[7] Pokora, Becky.“Credit Card Statistics and Trends 2023.” Forbes, 9 Mar 2023,

[8] The average credit card balance is $5,474 according to Forbes. If we calculate the simple monthly interest of a $5,474 balance with a 14.51% rate, the cost is $66.19. If we calculate the simple monthly interest of a $5,464 balance with a 20.68% rate, the cost is $94.32. This is likely the minimum increase as many credit cards calculate interest on a weekly or monthly basis, leading to increased cost due to compounding.




[12] To calculate the real interest rate you use the following formula: real interest rate = (1 + Nominal Interest Rate)/(1 + Inflation Rate) – 1. For the example described in the text, this would be: real interest rate = (1 +.0475)/(1 + .037) – 1 = 1.0475/1.037 – 1 = 1.0101 – 1 = .0101 or a real interest rate of 1.01%.