The average person should be debt free by the age of 58, unless you choose to extend your payments. Otherwise, you could potentially be making payments for another two decades before you become debt free. Now, if you were to use a more disciplined budget and well-planned payments, you could be done by age 39.
Between mortgage loans, credit cards, student loans, and car loans, it's not uncommon for the typical American to have one or more types of debt. The ones who are living debt-free may seem like a rarity, but they aren't special or superhuman, nor are they necessarily wealthy.
And yet, over half of Americans surveyed (53%) say that debt reduction is a top priority—while nearly a quarter (23%) say they have no debt. And that percentage may rise.
Is being debt-free the new rich? Yes, as long as you have money and assets, in addition to no debts. Living loan-free is a fantastic way to stay financially secure, and it is possible for anyone. While there are a couple of downsides to being debt-free, they are minimal.
They don't owe anything to the bank, so every dollar they earn stays with them to spend, save and give! Debt is the biggest obstacle to building wealth.
American household debt hit a record $14.6 trillion in the spring of 2021, according to the Federal Reserve. If you had to write that check it would read $14,600,000,000,000. Lucky for you, that debt is shared by about 340 million people.
Debt tends to soar during people's peak earning years, with individuals between the ages of 45 and 54 reporting the highest levels of debt and those in the 35-44 age bracket coming in second.
Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high.
How much money does the average American owe? According to a 2020 Experian study, the average American carries $92,727 in consumer debt. Consumer debt includes a variety of personal credit accounts, such as credit cards, auto loans, mortgages, personal loans, and student loans.
Former Société Générale rogue trader Jérôme Kerviel owes the bank $6.3 billion.
It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to save yourself from paying more interest later. If you're somewhere near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.
On average, Americans carry $5,315 in credit card debt, but if your balance is much higher—say, $20,000 or beyond—you may be feeling hopeless. Paying off a high credit card balance can be a daunting task, but it's possible.
Being debt free to start with means having minimal to no bad debts and average good debts. Being debt free doesn't mean you have no mortgage, bills, or car payment. It means you carry a manageable amount of debt, and are cognizant of your borrowing and DTI.
When you have no debt, your credit score and other indicators of financial health, such as debt-to-income ratio (DTI), tend to be very good. This can lead to a higher credit score and be useful in other ways.
While it may feel great to be debt free, it can actually hurt your credit scores.
A Critical Number For Homebuyers
One way to decide how much of your income should go toward your mortgage is to use the 28/36 rule. According to this rule, your mortgage payment shouldn't be more than 28% of your monthly pre-tax income and 36% of your total debt. This is also known as the debt-to-income (DTI) ratio.