If your mortgage, car and credit card payments are sucking up 40% or more of your gross pay, you probably already know that you're in big financial trouble.
The Federal Reserve uses this 40% mark as a "compelling indicator of distress" in household finances. And the less you make, the more likely you are to be in that squeeze.
Of households that earn $20,600 or less, more than one in four devote at least 40 cents of every dollar earned to debt payments, according to the Federal Reserve's latest Survey of Consumer Finances. Among the top 10% of earners, by contrast, fewer than one in 25 households has debt service that large.
But here's something interesting buried in the survey, published earlier this year: Higher-income folks are getting into trouble faster.
| Income | 1998 | 2001 | 2004 | 2007 |
|---|---|---|---|---|
$20,600 or less | 29.8% | 29.3% | 26.8% | 26.9% |
$20,601 to $36,500 | 18.3% | 16.6% | 18.5% | 19.5% |
$36,501 to $59,600 | 15.9% | 12.3% | 13.7% | 14.5% |
$59,601 to $98,200 | 9.8% | 6.5% | 7.1% | 12.7% |
$98,201 to $140,900 | 3.5% | 3.5% | 2.4% | 8.1% |
$140,901 or more | 2.8% | 2.0% | 1.8% | 3.8% |
- Among households earning $59,601 to $98,200, the percentage rose from 9.8% to 12.7%, or nearly 30%.
- For those earning $98,201 to $140,900, the percentage more than doubled, from 3.5% to 8.1%.
- In the stratosphere of those earning more than $140,900, the percentage with big debt burdens rose from 2.8% to 3.8%, a 36% increase.
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We're still talking about a minority of higher-income households taking on too much debt, especially compared with those on the bottom of the economic ladder.
But these statistics make clear what we knew anecdotally: that the debt binge has cut across economic lines.
It's not about income; it's about debt
Until now, one of the biggest economic divisions has been between those at the top of the economic pyramid and everyone else. Most of the income gains made since 1998 have accrued in households in the top 10%, while the earnings of other households have been relatively stagnant.Widening income disparities were masked in large part by looser lending standards, which allowed plenty of Americans to finance lifestyles they couldn't actually afford.
That credit binge led directly to the financial crisis and the current recession. Now, one of the big, defining differences will be between those who resisted the urge to max out and those who didn't.
Consider:
- Credit card companies are thwacking credit limits and jacking up interest rates, regardless of incomes or credit scores. Least affected are those who don't carry credit card balances. Most affected: those who carry big balances and can't quickly pay them off. (See "Banks have declared war -- on you.")
- Mortgage rates are low, allowing homebuyers and refinancers to lock in lower payments. But tighter underwriting standards mean those with big debt loads can't take advantage.
- Lenders are freezing or lowering limits on home equity lines of credit. Those who opened credit lines for emergencies and left them open and unused, as I have recommended, may still have access to this credit. Their neighbors, who maxed out the line to pay for a kitchen remodel, may not.
Continued: Shackled by debt, we're much less nimble