Household Debt Continues To Decline Amid High Interest Rates

Household wealth – the difference between what people own and what they owe – declined by $1.6 trillion in the first three months of the year, according to the Federal Reserve’s June release of its Release Z.1 – Financial Accounts of the United States. This was largely a result of the sharp stock market drop in March 2025, which since has reversed. But, at the same time, the first three months of 2025 saw a continuation of household deleveraging with total debt levels falling further relative to after-tax incomes. Debt levels relative to income fell amid still high interest rates, possibly leading to decreasing debt service ratios, although the Federal Reserve has not yet released those data.

The Federal Reserve’s Financial Accounts depict financial flows and stocks – outstanding assets and debts – across key sectors such as households, financial service firms and governments. The Fed releases these data every quarter. The June release shows a drop in household wealth in the first three months. Household wealth fell by $1.6 trillion during that time to $169.3 trillion at the end of March. This amounted to 760.0% of after-tax income – since wealth is meant to replace income, when people need it, for instance, in retirement. This was the lowest ratio since December 2023, according to the Fed data. Moreover, the decline in total wealth went along with a drop of $1.5 trillion in financial assets, reflecting the sharp stock market downturn in March of this year, as the price for the S&P 500 shows. That stock market decrease, which preceded an even sharper decline in April before recovering, erased all of the wealth gains over an entire year.

Wealth obviously could also decline because households take on more wealth. But, the opposite has been helping for some time now. Total household debt – mortgages, car loans, student loans and credit card debt, to name the most important forms of household debt – averaged 131.9% of after-tax income by December 2007, when the Great Recession started. It has declined since then and stood at 89.6% in March 2025. This was the lowest ratio – aside from the tumultuous income fluctuations during the pandemic – since September 1998. The household debt level is now at its lowest level in a generation.

All forms of debt have been falling relative to after-tax income in recent years. Mortgages have fallen relative to after-tax income since the Great Recession – from a high of 99.9% in September 2007 to 60.3% in March 2025, according to my calculations based on the June release of the Financial Accounts data. During that time, banks tightened lending standards and eventually house prices rose for an extended period of time, making it more and more difficult for people to afford a new house. The Federal Reserve’s interest rate increases further slowed demand for mortgages. The decline in mortgage debt is thus not surprising.

It also recently went along with a drop in other nonrevolving consumer debt – mainly student and auto loan debt. This form of debt reached its low, relative to after-tax income, during the Great Recession. It then rose from a low of 14.6% of after-tax income in June 2009, as my calculations based on the Financial Accounts as well as the Federal Reserve’s release on consumer credit show, to a high of 19.1% in June 2022. My calculations apply the ratio of non-revolving consumer credit to total consumer credit from the Federal Reserve’s release G.19 – Consumer Credit to the amount of other consumer credit in the Financial Accounts. This allows me to calculate the ratio of other consumer credit to after-tax income. As it became harder for people to take out mortgages and home equity lines, they turned to other often costlier forms of debt such as student and auto loan debt. When interests went up, though, those forms of debt declined to 17.2% in March 2025 – the lowest such level since March 2013. This is a clear sign that households became more cautious in taking on debt.

The data on credit card debt further underscores this point. I calculate the ratio of credit card to after tax income by dividing the amount of non-revolving consumer credit – almost all of it is credit card debt – from Release G.19 by after-tax income in the Financial Accounts. That ratio stood at a record high of 9.4% in December 2007 to 6.4% in March 2020, just as the pandemic got under way. Credit card debt relative to after-tax income has hovered around 6.0% since the pandemic reaching a recent high of 6.3% in December 2023. It gradually declined to 5.8% in March 2025. Again, households appear to have gotten more cautious in taking on debt as interest rates climbed and stayed high among the Federal Reserve’s tighter monetary policy.

The latest Federal Reserve data show that household debt has declined amid rising and high interest rates. This decline was not enough to stave off rising debt service ratios in 2024, as calculations by the Federal Reserve show. The further decline in debt-to-income ratios 2025 may have provided some relief in debt service.

Moreover, the drop in debt may be short lived if the labor market slows. Many households have few savings to help to help them in an emergency. The Federal Reserve’s recent release of the 2024 Survey of Household Economics and Decisionmaking shows that 37% of people could not come up with $400 in an emergency. If income and the labor market slow, many people may have to borrow more again since they have little money in reserves. Consumer debt could go up again and raise people’s debt service costs when debt rises and incomes fall.