The 2 big reasons Americans took on so much debt in 2021

Buyers were forced to borrow more to finance the increasing cost of homes and cars.

Lisa Rabasca Roepe

By 

Lisa Rabasca Roepe

Lisa Rabasca Roepe

Contributing Reporter

Lisa Rabasca Roepe is a contributing reporter at Policygenius, where she covers personal finance and insurance news. Her work has appeared in The New York Times, Fast Company, Wired, Business Insider, Quartz, The Atlantic's CityLab, and the Boston Globe.

Published February 21, 2022 | 5 min read

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one trillion debt 2021

Household debt increased by $1 trillion during 2021, the largest increase since 2007, according to the Quarterly Report on Household Debt and Credit issued by the Federal Reserve Bank of New York’s Center for Microeconomic Data.

The increase in household debt reflects the sharp increases in the prices of homes and cars through 2021, according to the New York Federal Reserve. Buyers were forced to borrow more to finance the additional cost. 

Mortgage balances drove almost the entire increase, growing by $900 billion in 2021. But auto loan balances also had a banner year, growing $84 billion, thanks to a $734 billion in new auto loans, the highest figure the New York Fed has recorded.

Mortgages, auto loans, and credit card balances all increased in 2021 with 224 million new loan accounts opened in the fourth quarter of 2021, the report found.

Did your debts grow in 2021? We asked experts how to whittle down record-breaking debt.

Pay off your credit cards first

Experts agree that it’s best to prioritize paying off your credit card first. “It’s simple math, pay off the higher rate of debt first,” says Kelley C. Long, a certified financial planner in Tucson, Arizona.

Even if your credit card charges 0% interest for the first 12 or 18 months, it’s best to pay it off as soon as possible because once that deal ends, you will be paying between 15% and 29% in interest, says Daniel M. Yerger, certified financial planner and president of My Wealth Planners in Longmont, Colorado. If you have credit card debt, consider taking out a low-interest rate home equity loan to pay off credit cards or transfer the balance to another credit card with a 0% interest offer. Just make sure you pay that card off before the rate increases, he says.

Consumers can easily get into debt with a credit card that offers 0% interest, Long says. If you don’t pay your balance in full each month, eventually you’ll be paying that money back with interest, she says. If your card offers 18 months at 0% interest, divide the balance by 18 and make that amount your monthly payment, she says.

Know when it’s OK to pay the minimum 

Experts say there are times when it makes sense to make the minimum payment. Right now, interest rates are relatively low compared to inflation so if your auto loan or your student loan is 3% or less, it’s fine to just pay the minimum each month, Yerger says.

“It comes down to what you’d be doing with the money instead,” Long says. “If you have a lot of cash sitting in a savings account, it would make sense to pay off the loan sooner.”

But if paying down the debt faster means you’re unable to contribute to your 401(k) plan at work and you’re missing out on a 100% match, it makes sense to prioritize your retirement plan and make the minimum payment on a low-interest loan, Yerger says. If the 401(k) has a higher expected return than the expected cost of paying interest on your auto or student loan, it’s a more effective place to put your money.

The only time this approach doesn’t make sense is if your student loan has an income-based repayment plan and you’re not on track for public service loan forgiveness, says Stephanie Genkin, certified financial planner and founder of Brooklyn, New York-based My Financial Planner. In that case, you will want to pay more than the minimum amount each month. If not, your monthly payments won’t be large enough to cover the interest and the loan balance will keep growing, Genkin says. 

Make a budget

If you have debt to pay off, Genkin suggests using a 50/20/30 budgeting framework, where 20% of your monthly net pay is used for debt repayment. For instance, if your monthly net income after taxes is $2,800, then you’d use 20% or $560 each month to pay down your debt. If 20% seems like too much, Genkin suggests starting with 10% and building up from there. As for the rest of your income in this framework, 50% is for basic expenses such as rent, utilities, medical expenses, food and transportation, and 30% of your income is for discretionary spending. 

If you want to pay more than the minimum each month, look for places to cut spending and use the savings to pay down debt, Yerger says. For instance, if you’re not going to the gym, cancel your membership, or if you pay for four streaming services, only keep the one service you use the most. Once you find those savings, automatically put that money toward paying off your debt. Otherwise it’s too easy to spend it, Long says. 

Be aware that interest rates will increase soon

The Federal Reserve is expected to raise interest rates this year.

→ Should you be worried about interest rates going up? It's complicated

“As interest rates rise, people should be aware that taking on debt in the future will be problematic,” Yerger says. If you’re considering refinancing, you should do it now because it might not be an option when interest rates increase, Yerger says.

Interest rates might make it harder for consumers to pay down their debt. 

“Consumers who have been struggling may find themselves in the uncomfortable position sometime in the spring where they see their interest rate is higher on their credit card,” Genkin says. Once interest rates increase, credit cards that offer 0% interest will be harder to find, Long says.

Image: Douglas Keister / Getty Images