You’d think that in the course of the pandemic, consumers would be taking a step back on the borrowing front. But actually, consumer debt increased by $85 billion during the first quarter of 2021, bringing that total to $14.64 trillion.
The reason for the upswing? Mortgages and auto loans.
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Healthy debt is on the rise
When it comes to good debt vs. bad debt, there are some key differences.
Compared to good debt, such as mortgages and auto loan debt, credit card debt can be detrimental. Not only do credit cards charge exorbitant amounts of interest, but too much credit card debt can cause a credit score to drop.
On the other hand, mortgage and auto loan debt are considered the healthy type of debt to have. Mortgages help consumers own and build equity in an asset that has the potential to increase in value over time. And while vehicles are known to lose value rather quickly — they’re an important thing to own, as they allow people to hold down jobs and just plain function.
During 2021’s first quarter, mortgage debt rose by $117 billion and now sits at $10.16 trillion. A big reason so many borrowers signed mortgages is that interest rates held steady at competitive levels for the first three months of 2021. Many existing homeowners also refinanced their mortgages, and many went the cash-out refinance route, adding to their loan balances in the process.
Meanwhile, auto loans increased by $8 billion during 2021’s first quarter to $1.38 trillion. At several points throughout the pandemic there were attractive deals to be had on vehicles, which may have inspired consumers to upgrade.
What also may have helped matters is two rounds of stimulus checks that arrived in and around the first quarter. The first, a $600 check, was approved in late December and hit many people’s bank accounts in January. A second $1,400 round was approved in mid-March and started arriving later that month. Those checks may have served as vehicle down payments.
Credit card debt is down
Not only did consumers take on more healthy debt during 2021’s first quarter, but they also managed to shed unhealthy debt. Credit card balances fell to a total of $770 billion, which is $157 billion lower than where they sat at the end of 2019.
All told, the first quarter of 2021 saw some positive trends on the borrowing front. As the U.S. economy continues to stage its recovery and the jobless rate declines, we could see credit card balances drop even further as unemployed workers start collecting a paycheck again. And seeing as how mortgage rates are likely to stay low for the remainder of the year, there’s a good chance borrowing activity will remain strong there as well. Swapping home and auto loans for credit card debt could help many consumers improve their credit — and put themselves in an even stronger place financially as the country attempts to move forward from the pandemic.
View more information: https://www.fool.com/the-ascent/personal-finance/articles/consumer-debt-climbs-to-146-trillion-driven-by-mortgages-and-auto-loans/