The Top 5 Impacts of Debt and What Financial Institutions Should Do About It

American debt is on the rise, impacting individuals' short-term and long-term financial well-being. Logica's recent Future of Money report includes a special report on debt that highlights generational attitudes and insights regarding debt—like the growing debt burden for Gen Xers and Millennials, and the wariness of Gen Z in taking on debt.

More than half of Americans find themselves burdened by personal debt, a reality that has been entrenched more deeply by recent U.S. economic conditions. Debt affects both short-term and long-term financial wellbeing for many Americans. Logica’s recent special report on debt from the Future of Money study takes a closer look at the current situation. The study showed that day-to-day, people report challenges in meeting routine and regular life expenses. Long-term, they report trouble achieving financial goals and milestones. Here’s what financial institutions can do to help.

The Numbers Around American Debt

Our report found that economic challenges are leading Americans to take on more debt now, and most generations are taking on more debt than they were six months ago. On average, 25% of respondents report taking on more debt, versus 12% six months ago. In particular, almost a third (30%) of Gen X reports taking on more debt than six months ago, with Millennials a close second, at 26%.

Individuals report carrying approximately $20,000 in personal debt, exclusive of home mortgages. Gen X is the most likely to have significant debt, with the Federal Reserve reporting that Gen Xers hold about 38% of liabilities in the U.S. valued at about $7.1 trillion. Our study shows 67% of Gen Xers report carrying personal debt. According to Business Insider, Gen X’s trouble with debt is “likely due to a life stage in which they could be paying a mortgage, parenting, and caring for aging parents all at once.” Millennials are also entering what is known as the sandwich generation (caught between the expenses of childcare and elder care) phase as they age. As the largest generation, Millennials’ overall debt burden may soon bypass Gen X.

A Startling Statistic:

The percentage of Gen Xers with personal debt:

This debt burden of Gen X and Millennials is a pattern that may not be followed by Gen Z, as they are starting adulthood with more caution and wariness around debt. Our Future of Money study shows that Gen Z is less likely than other generations to say they are taking on more debt (21%) than six months ago, even though they may be considering taking on debt in the face of the current economic situation. This generation has the lowest debt levels in most areas we examined — except for student loans. And they are less likely to use credit cards.

Common Forms of Debt

Credit card debt leads the way among Americans, with 43% of those who have debt reporting credit card debt. Older generations report the most credit card debt, with Boomers at 50% and Gen X at 44%. Yahoo! Finance reports that nearly half of Americans have been carrying credit card debt since 2018-2022 — and 15% haven’t been credit card debt-free since before 2008, and that many use credit cards to cover essential living expenses.

But Gen Z once again breaks the mold here, telling us that they prefer to use debit cards over credit cards. This suggests that this generation might be looking for different credit levers when they find themselves in financial need.

While credit card debt is prevalent, loans also make up a large portion of people’s debt “portfolio” with 25% paying on mortgages, 21% paying on auto loans, and 15% paying on student loans. According to our study, one in 10 Americans also carry personal loans.

Read more:

Top Five Impacts of Debt

The burden of debt affects the way Americans live their lives in many ways. We identified the top five impacts.

1. Living paycheck-to-paycheck: The ramifications of debt are most apparent in the increasing number of Americans living paycheck to paycheck (57%), hampering their ability to save for the future. The SHRM Foundation shares that inflation continues to take a toll on financial health, with people reporting that “overwhelmingly salaries have not kept up with the rising cost of living.” And this impacts all areas of financial decision-making.

2. Delayed or not taking a vacation: Thirty-five percent (35%) of people told us they will either cancel or delay vacations due to their debt situation. For those that do embark on vacations, CNN notes that many are “trading down” for cheaper options.

3. Unable to save for large purchases: Those with debt report struggling to gather enough funds for significant purchases (32%) like a car. In fact, they can’t even save enough for an emergency fund, as noted in a recent article by CNBC. Our study shows 24% of people had to borrow money just to meet regular expenses, let alone a large purchase or emergency.

4. Cannot contribute to retirement: Thirty-two percent (32%) of people cannot save for retirement due to debt, inflation and trying to make ends meet. If we take a look by generation, this is most prevalent among Gen X, with 39% unable to contribute to any kind of retirement fund right now.

5. Unable to start or continue investing: Our study also shows that 26% of people can’t continue contributing to investments — or even start investing at all at this point.

Some other areas of impact include the inability to save for children’s education, buy a house or start a family. So what are some of the ways Americans are dealing with their debt — and trying to get ahead?

Expense Management and Debt Growth

To navigate daily expenses with debt, we can see that Americans turn to credit cards and utilize Buy Now Pay Later (BNPL) options. However, current economic conditions are influencing decisions regarding taking on additional loans or credit. The study shows various ways people are managing regular expenses in the face of the current economy: using existing credit cards (53%), using BNPL (30%), taking out personal loans (23%) and opening new credit card accounts (17%). These are all activities that contribute to the debt burden.

So how are Americans managing the debt brought on by expense management? Some opt to live with family and friends to economize. This is especially true for Gen Z with 33% of respondents going this route. But they are still borrowing for regular expenses — and delaying financial milestones like buying a house.

What Can Financial Institutions Do to Help?

Debt management techniques and approaches vary based on the individual. Many will prioritize finding the best interest rates to manage debt as rates stabilize or decline. They will seek opportunities to refinance and consolidate their loans for improved financial management and a chance to get out of the debt burden more quickly. But many are also looking for a true partner in their path to debt management, along with ease of use. However, Gen Z might need a different strategy.

Our research shows that the digital natives of Gen Z have expectations for digital tools and online platforms. They also look to multiple sources for information, including social media outlets like YouTube and TikTok. It is important for financial brands to have the right presence, branding, messaging and influencers on social media. Peer-to-peer marketing is key for this generation.

A Key to Success:

Peer-to-peer marketing is one of the strongest tactics to provide Gen Z'ers with the financial education content they're looking for — and that can come from social media outlets like TikTok and YouTube.

Generally, all generations want quick processing times along with efficient service and user-friendly digital tools. That doesn’t mean people aren’t looking for human touchpoints. The personal touch is still going to be important for financial decision making and for advising on different paths to financial health.

Employing strategic promotions, empathetic messaging — and proactive awareness campaigns that really speak specifically to target customer needs — will be key to gain customer choice and loyalty. By leveraging innovative approaches and harnessing a deep understanding of customer and prospect needs in today’s economic climate, financial institutions can help with American debt.

Debt and economic conditions will continue to shape the complex landscape of financial decision-making for people of all ages. It will be essential to gain a deep understanding of where financial customers are in their journey, in order to best serve them.

The Logica Research Future of Money Study is a twice-yearly research report that offers a detailed 360-degree snapshot of the current consumer money mindset. The online study has been running since 2017 and is conducted among 1,000 U.S. adults and an augment of 200 older Gen Zers (16-25 years old). This general population sample has a median income of $70,000.

This article was originally published on . All content © 2024 by The Financial Brand and may not be reproduced by any means without permission.