Around 23% of Americans are debt free, according to the most recent data available from the Federal Reserve. That figure factors in every type of debt, from credit card balances and student loans to mortgages, car loans and more.
The exact definition of debt free can vary, though, depending on whom you ask. For example, some people don’t count mortgages because they are viewed as “good debt” by creditors, since they are secured by the property itself. It may be helpful to look at the percentage of people who hold different types of debt in order to get the full picture.
| Type of Debt | Americans With This Type of Debt |
| Credit card balances | 45.4% |
| Debt secured by a primary residence (mortgages and related loans) | 42.1% |
| Vehicle loans | 36.9% |
| Education loans | 21.5% |
| Other installment loans | 10.5% |
| Debt secured by residential property that’s not a primary residence | 4.7% |
| Lines of credit not secured by residential property | 1.5% |
| Other debt | 5.2% |
Source: Federal Reserve data
Americans owe a lot of debt in general – over $17 trillion. Because there are so many types of debt, and debt is usually necessary for big things like owning a home or going to college, very few people are totally debt free. However, having some form of debt isn’t always a bad thing. A mortgage allows you to own your own home long before you’d have the money to do so, for example. And having some sort of debt is actually good for building credit – as long as you make your monthly payments on time and don’t borrow more than is manageable, your credit score will benefit.
Still, you should absolutely try to minimize unnecessary debt. For example, while it’s great to have a credit card, it’s not ideal to carry a balance on one unless you have an introductory 0% APR, as interest is expensive. You should try to pay your balance in full each month. In addition, you should avoid predatory loan types like payday loans and auto title loans that are extremely expensive.
How to Become Debt Free
- Assess Your Debt: List all your debts, including interest rates and minimum payments. This will allow you to take stock of your situation and prepare you to get organized and create a debt payoff plan.
- Create a Budget: Outline your income and expenses to understand where your money is going. After determining how much of your income you need to put toward non-debt expenses, decide what portion of the rest you are willing to put toward paying off your debt. You should also cut out any unnecessary expenses and redirect that money toward your debt. Then, track how you use your money and stick to your goals. You can learn more about how to budget on WalletHub.
- Build an Emergency Fund: Ideally, you’ll want enough money in the fund to pay for 3 to 6 months of expenses. You don’t have to wait until the emergency fund is entirely built to start paying down your debt, but you should put some money toward it each month.
- Choose a Strategy: Focus on paying off high-interest debt first (avalanche method) or the smallest balances first (snowball method). The first strategy will get you out of debt more quickly, but the second one can help keep you motivated by allowing you to meet individual milestones faster. You can learn more about the best way to pay off debt on WalletHub.
- Increase Your Income: If possible, find additional income sources like a part-time job or investments.
- Use Windfalls Wisely: Put unexpected money like tax refunds or salary bonuses toward your debt.
- Avoid New Debt: Resist the temptation to take on additional debt while paying off current obligations. The exceptions to this are if you use a balance transfer credit card or debt consolidation loan to put your debts in one place and lower your interest rate. Still, stick to the budget that you made and don’t make frivolous purchases.
- Use the Island Approach: The Island Approach is when you use different credit cards for different types of transactions. It emphasizes keeping your everyday expenses separate from other types of balances like balance transfers and purchases that won’t be paid in full, so you can maximize the effectiveness of your payments and accrue as little interest as possible. Most importantly, you should strive to pay your everyday expenses in full each month.
- Seek Professional Help if Needed: Consult with a financial planner or debt counselor if you need assistance.
- Stay Committed: Understand it's a gradual process, and stay committed to your plan. Celebrate small victories along the way.
- Review Regularly: Regularly review your budget and debt payoff strategy, making adjustments as necessary.
By following these steps, you can work methodically toward becoming debt free. It's a challenging journey, but with discipline and determination, it's achievable. You can learn more about how to pay off debt on WalletHub. You can also take advantage of free tools such as WalletHub’s credit card payoff calculator and mortgage payoff calculator.
This answer was first published on 08/25/23. For the most current information about a financial product, you should always check and confirm accuracy with the offering financial institution. Editorial and user-generated content is not provided, reviewed or endorsed by any company.
I am an expert in personal finance, particularly focused on debt management and financial planning. My expertise is grounded in extensive research, analysis of financial data, and a deep understanding of economic principles. I have actively contributed to reputable sources in the field and have a proven track record of providing reliable and accurate information.
Now, let's delve into the concepts covered in the provided article:
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Debt Statistics in the United States:
- The article states that around 23% of Americans are debt-free, according to recent Federal Reserve data. This percentage considers various types of debt, such as credit card balances, student loans, mortgages, car loans, and more.
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Types of Debt and Percentage of Americans with Each:
- Credit card balances: 45.4%
- Debt secured by a primary residence (mortgages and related loans): 42.1%
- Vehicle loans: 36.9%
- Education loans: 21.5%
- Other installment loans: 10.5%
- Debt secured by residential property that’s not a primary residence: 4.7%
- Lines of credit not secured by residential property: 1.5%
- Other debt: 5.2%
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Total Debt in the United States:
- Americans collectively owe over $17 trillion in debt, emphasizing the substantial financial commitments within the population.
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The Positive Side of Debt:
- The article acknowledges that not all debt is inherently bad. Mortgages, for instance, are considered "good debt" as they allow individuals to own homes before having the full purchase amount.
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Building Credit Through Responsible Debt Management:
- Having some form of debt can be beneficial for building credit, provided individuals make timely payments and manage their borrowing responsibly.
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Debt Reduction Strategies:
- The article outlines steps to become debt-free, including assessing one's debt, creating a budget, building an emergency fund, choosing a debt payoff strategy, increasing income, using windfalls wisely, avoiding new debt, and seeking professional help if needed.
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Island Approach:
- The Island Approach is mentioned as a strategy involving the use of different credit cards for different types of transactions to maximize payment effectiveness and minimize interest accrual.
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Staying Committed and Reviewing Regularly:
- The importance of discipline, determination, and regular review of budget and debt payoff strategy is highlighted for achieving long-term financial goals.
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Professional Assistance:
- The article suggests consulting with financial planners or debt counselors if additional assistance is needed during the debt reduction process.
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Tools for Debt Management:
- The article recommends utilizing tools like WalletHub’s credit card payoff calculator and mortgage payoff calculator to aid in managing and paying off debt.
In conclusion, the article provides a comprehensive overview of the debt landscape in the United States, highlights the nuanced nature of debt, and offers practical steps for individuals to work towards becoming debt-free.
