Tuesday, January 5, 2016



Many Americans lie to themselves about (or at least pretend not to see) how much debt they have — and it's costing some of them tens of thousands of dollars.

The average U.S. household now has $129,579 in total debt, which includes credit cards, mortgages, auto loans and student loans, That's up roughly $5,000 from just two years ago.

Americans are deeply in debt:

Total owed by average U.S. household carrying this type of debtTotal debt owed by U.S. consumers
Credit cards$15,355$712 billion
Mortgages$165,892$8.12 trillion
Auto loans$26,530$1.03 trillion
Student loans$47,712$1.21 trillion
Total debt$129,579$11.91 trillion

Not that they necessarily know they have this much debt (or want to admit it), at least when it comes to their credit card and student loan balances. The total amount of credit card debt that U.S. consumers say they have is 37% lower than the debt that lenders say they have and for student loans it is 25% lower, a study released in October 2015 by the New York Federal Reserve found.

"People do indeed lie to themselves about a number of things ... including their financial status," says psychologist Jude Miller Burke. Many don't want to believe that they have behaved irresponsibly by taking on the debt and thus are "very capable of constructing elaborate explanations as to why we behaved the way we did.

People may have some inclination that they have a lot of debt, but taking a deep look can be similar to getting on the scale to weigh ourselves after Thanksgiving dinner. In other words, a pretty horrifying thought, so they avoid doing it. And sometimes, people avoid the debt issues because "there may not be any solutions. Indeed, if you know you don't have the money to pay down the debt, you may avoid knowing how much you have.

Interestingly, the Federal Reserve study shows that consumers accurately reported their levels of mortgage and auto loan debt. This may be because auto loans and mortgages are considered "good" debt, so people may be more honest with themselves about those. It may also reflect the kinds of people who tend to get mortgages and auto loans vs. credit cards and students loans both of which are, in some cases, more easily given to novice borrowers.

Currently, the average household is paying more than $6,600 in interest per year, which means that roughly 9% of the average household's income is being spent on interest alone. Those numbers seem a lot more gruesome when you think about how they might look for someone lying to themselves about their debt and in doing so, likely not creating a plan to pay them off the debt quickly and effectively.

If you have the average amount of credit card debt ($15,355) and a 15% interest rate and only pay the minimum on that debt each month, let's say it's interest plus 1% of the balance, it will take you more than 31 years to repay your debt and will cost you more than $18,600 in interest payments alone. If, rather than simply paying the minimum, you paid off just 5% of the balance each month, you could pay off that debt in about one third the amount of time and would save more than $10,000 in the process.

Furthermore, the ramifications of this debt denial are greater than just financial. That's because on a deeper level, you realize this is not a smart move. The disparity between your actions and what you know is best can cause distress in the form of shame, guilt, depression or anger, as well as coping mechanism to deal with that distress, such as substance abuse.

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