What you may not have realized about debt

Owing money can be both deadly and lucrative. Here's how to tell the difference

By Bloomberg News

Jul 29, 2015 @ 2:47 pm EST

Ben is smiling underneath
Ben is smiling underneath

Debt can feel like an anchor tied to your feet. Credit cards and payday loans can drown borrowers in interest charges, student loans can ruin graduates' post-college plans, and underwater mortgages can trap homeowners.

Debt can also be a buoy. A student loan can help workers go back to school and get better jobs. Mortgages can help families build home equity and ultimately, wealth. Even a credit card can come in handy during emergencies. Pulling out the plastic may be the only way for cash-poor workers to repair the cars that get them to work.

Americans' love/hate relationship with debt is on full display in a new report by the Pew Charitable Trusts. Almost everyone uses debt, the study finds, but we also judge each other harshly for overusing it. Perhaps surprisingly, the Americans most enthusiastic about debt are older.

This could reflect the wisdom of age. Pew's data suggest that debt isn't so dangerous when used responsibly. The study looked at the baby boomers who have the most debt. The top third of the generation, by debt, has a median load of $200,000, $162,500 more than the boomer median, but these especially indebted boomers also have a median net worth of $298,500. They're worth more than twice the median boomer and they earn 68% more.

The "silent generation," born 1928 to 1945 and now mostly retired, has the least debt of any generation: a median load of just $3,540. That's largely because members have already paid off debts. The third of that generation with the least debt — a median of zero — has a median net worth of $637,000.

But while many members of the Baby Boom and the older silent generation took out debt while building substantial nest eggs, the data suggest that younger Americans haven't been so lucky. The housing bubble inflated and deflated just as Generation X was entering its prime working years. In 1989, the average boomer was 34 years old and carried $52,897 in debt, adjusting for inflation. When the average Generation Xer turned 34 in 2007, the cohort's inflation-adjusted debt stood at $118,391. Most of the increase came as debt incurred for housing.

Will debt eventually work the same trick for the younger generations as it did for boomers and their parents? Let's hope so, because young people are hardly running away from it, the Pew data show.

Millennials' median household debt load is $46,000, about the same as their median income. Gen X has a median debt load of $103,800, 53% more than income. Overall, the most common kind of debt is a mortgage, held by 44% of all households. But 39% have credit-card debt, 37% have borrowed to buy a car and 21% owe money on student loans.

All this makes it odd that Americans are so judgmental about others' use of debt — and anxious about their own. Eighty-five percent of the respondents say “Americans use debt to live beyond their means,” and 79% say “Americans do not usually use debt in a responsible way.” Maybe they're projecting their own worries onto other people: Some 69% say “debt is necessary, but I prefer not to have it.”

There is dangerous debt: Frivolous credit-card spending, a mortgage used to buy more home than the buyer can afford and a student loan for a useless (or uncompleted) degree.

But Americans, particularly young families who are starting out, should worry a lot less about debt if they are using it responsibly and carefully. In many cases, debt can be a powerful tool to build careers and wealth.

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