Survey data on U.S. finances during the COVID-19 pandemic seems to suggest a sort of divided and forked economy.
While some have accumulated more savings during the pandemic period, others took on more family debts such as mortgages and student and auto loans. Recent data from the Federal Reserve Bank of New York shows the aggregate amount of household debt steadily increased in 2020.
Leading Marketplace Economy Contributor Chris Farrell spoke to Marketplace Morning Report host David Brancaccio to find out who is and is not in more debt lately, and why . The following is an edited transcript of their conversation.
David Brancaccio: So despite the savings we hear about, are we still really in debt?
Chris Farrell: Oh, we’re really in debt. The latest report from the Federal Reserve Bank of New York in the fourth quarter of last year puts total household debt at over $ 14.6 trillion. And most of that debt, of course, is mortgages. But if you look at credit cards, student loans, you know, non-housing debt, it’s still 31% of the total.
Brancaccio: And it is also the elderly.
FarrelI: Well, this is one of the most striking and disturbing signs that recent research has been done on how people 70 and over are increasing their debt. Part of it is mortgage debt, it is also credit card debt. And that’s something we haven’t seen for a long time. And what it seems to be is that people borrow to, you know, pay for their medicine, to meet basic needs. It is therefore worrying. And that’s more and more a part of being an older American.
Brancaccio: When you look at all of this debt, by and large, a lot of it is owed on your home – mortgage debt. But it’s an asset, isn’t it? In theory, this is appreciable.
Farrell: That’s right. And that fuels a number of economic studies, David, that have looked at, OK, so you’ve got debt. You know, which one do you pay first? And what economic studies show is that you want to pay off your credit card debt first. And the reason is that it’s very easy not to pay off that balance at the end of the month, and it keeps growing. And so it causes a lot of stress that people really worry about. And the other aspect of credit card debt is that you are not paying for an asset. It is not an investment. So overall the most stressful debt, the debt that really takes a toll on your mental health, is credit card debt.
Brancaccio: Yes, so pay it off, except we are in a pandemic recession where a lot of people are suffering.
Farrell: It’s a pandemic. Now Experian, which is the credit bureau, their data is down – credit cards are down about 14% from 2019. And that reflects people who have jobs and few opportunities for spending. . So you might as well pay off some of the credit card debt. However, we are still a very leveraged company.