The Modern Theory of Finance says that borrowing and investing today allows individuals to select both optimal investments now (such as borrowing for college to earn greater income in the future) and to also optimize future consumption patterns (like investing for retirement supporting a better lifestyle when income from employment lags). From a theoretical perspective, borrowing today is fine as long as the rate of return exceeds the cost of capital.
Many things we borrow for, however, have little if any value immediately after purchase or consumption. The same is true with a restaurant meal purchased and consumed, cruises, spas or vacations. Borrowing for medical that heals, on the other hand, has a non-monetary return that still is a sound investment. Debt can be an investment or mothing more than an obligation to repay.
The amount and type of debt we carry varies from one-person-to-the next and also from state-to-state. HowMuch.net combined findings from the Federal Reserve Bank of New York and Credit Karma to detail debt by state. Debt sources included credit card, student loan, auto and mortgages. Not included were the individual share of federal, state, and local government debt (to be the topic of the next blog).
The following two tables show the 10 states with the greatest and least amount of debt per capita. On average, each person in the U.S. carries $50,090 of debt. The District of Columbia has the greatest average per capita debt at $86,730 (73 percent more than the national average) while West Virginia at $29,430 is the least (41 percent less than the national level). Note the U.S. has an average 2.53 people per household, so the typical debt per household in the U.S. is $126,728.
Total debt does not tell the entire story since some debt is an investment (such as a house or a college loan), while other debt is merely the residual obligation of prior consumption (such as credit card expense for a restaurant meal, a plane ticket or a hotel stay). The next tables show the average credit card debt levels per person by state with the most and least credit card debt. Also calculated is the percent of total debt from credit cards. At an average 2.53 people per household in the U.S., average credit debt totals $8,147. Alaska, with an average 2.81 people per household, has a $12,224 total credit card debt per household.
Autos are typically the second greatest expense following housing for households, but unlike housing, autos generally depreciate rather hold their value. CARFAX notes the typical auto will drop in value by 10 percent in the first month of use and by 20 percent in the first year. The next tables show the greatest and least per capita auto debt by state. Texas tops the list at $6,720 per capita and with 2.84 people per household equates to an average $19,085 auto debt. Four states – Texas, Georgia, New Mexico and Wyoming – are included in the top-10 states with the most miles driven annually per licensed driver according to the U.S. Department of Transportation, Federal Highway Administration. Six of the 10 states with the least auto debt per capita ranked in the bottom 10 states for the fewest miles driven annually per licensed driver.
These tables show the per capita student loan debt by state for the top- and bottom 10 states. Six of the 10 states with the most student debt per capita also ranked in the top-10 states on the percent of residents with at least a bachelor’s degree: the District of Columbia, Massachusetts, Colorado, Maryland, New Jersey, and New York.
Next shows the average mortgage loan debt per capita. These numbers are skewed by multiple factors varying from one state to the next:
Median home prices
Percentage homeownership rate
Percent of homeowners with no debt outstanding (age being a factor)
Differing debt-to-equity ratios by state
Number of people per household
Like student loan debt, mortgage debt, in general, is an investment rather than a residential obligation from prior consumption. Mortgage debt can be a big negative if it is from a cash-out refinance that paid off credit card and/or auto loans. Key to mortgage debt consideration are what rents would otherwise be. Mortgage debt makes up two-thirds of individual debt outstanding.
The last table details each of the debt categories by state.
To view the graphic and data from HowMuch.net click https://howmuch.net/articles/americas-total-debt-per-capita
To read the Credit Karma study on debt by state click https://www.creditkarma.com/insights/i/states-with-most-debt/
Debt is much like cholesterol—some types are good and other types bad. All debt, however, needs to be repaid at some point when it comes to individual debt.