Millions of Americans either underestimate or underreport how much debt they have -- often by a lot. It's a self-deception that can be very costly.
Quick: How much debt do you have? If you’re like many Americans, you either can’t answer that question or you won’t answer it truthfully.
On average, U.S. households are now shouldering debt totaling $129,579, which is about $5,000 more than in 2013, according to a new report from NerdWallet. That includes the money owed on mortgages, student loans, credit cards and car loans.
Under the right circumstances, mortgage, student and auto loan debt can help strengthen your financial position. However, credit card debt — and other debt with high interest rates — tends to be unnecessarily costly and should be paid off as soon as possible.
The average household has about $15,355 in credit card debt. Total credit card debt in the United States has reached $712 billion.
Interestingly, consumers tend to underestimate or underreport their student loan and credit card debt, sometimes unintentionally, NerdWallet said. In 2013, lender-reported credit card debt was a whopping 155 percent more than what borrowers reported.
“People do indeed lie to themselves about a number of things … including their financial status,” psychologist Jude Miller Burke, the author of “The Millionaire Mystique: How Working Women Become Wealthy and You Can Too!” told MarketWatch. “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,” she added.
A study released in October by the New York Federal Reserve revealed that U.S. consumers typically say they have about 37 percent lower debt than they actually have. When it comes to student loans, consumer reported debt is roughly 25 percent lower than reality.
Continually carrying debt is costly. The average household with debt pays about $6,658 in interest annually, which represents about 9 percent of their income. MarketWatch says:
If you have the average amount of credit card debt ($15,355) and a 15 percent interest rate and only pay the minimum on that debt each month (let’s say it’s interest plus 1 percent 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 percent 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.
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