Being in debt is sometimes stereotyped as being a bad thing or something that people only do if they don’t have a lot of money or are living beyond their means. The reality, however, is that low-income people aren’t the ones who borrow the most money, and borrowing isn’t always a bad thing.
Indeed, the data of the Federal Reserve shows that rich people end up borrowing a lot more money than the lowest earners in the country. And the richest 1% of the population actually owns a whopping 4.6% of all debt, while the poorest 50% in the country have only 36% of outstanding debt.
Here’s why the rich are borrowing a lot more money than expected.
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The rich borrow a lot, but they tend to use credit strategically
According to the Federal Reserve, there are a few main reasons why the rich tend to borrow more than the poor.
The first big reason is that wealthier people, in general, tend to have much higher mortgage debt than those with lower incomes. And because they’re in a better position to get mortgage approval, they’re more likely to own a home. Low-income people who cannot afford a home or cannot get mortgage approval will not have mortgage debt.
Wealthy people also tend to take larger mortgages and buy larger homes. This is because they can take advantage of the mortgage interest deduction, which essentially subsidizes their home purchase since the government covers part of their interest costs through tax savings. While the deduction is also available for low-income people, you have to itemize it to get it – and a large standard deduction often means the breakdown only makes sense if you are wealthy and have a lot of individual deductions to. claim .
Underwriting mortgages tends to benefit wealthy Americans because owning a home helps them increase their equity. They gain equity in their home as they pay off their mortgage, and their wealth increases as the property’s value increases.
The richest 1% of Americans also hold 2.1% of consumer credit, which includes credit card debt. However, while wealthy Americans often charge a lot on their cards to earn rewards, they are also likely to pay off their balance in full before having to pay interest on their credit card. While these balances are paid off, they still show up in the total outstanding credit that wealthy people have, as card companies sometimes report a balance before it is fully paid.
Data shows that while rich Americans borrow a lot, they do so strategically and use debt as a tool. The loans they make tend to earn them tax deduction (in the case of a mortgage) and credit card rewards, and they don’t pay much interest because they pay off the balance in full. their card and because mortgages tend to have low rates. In the case of a mortgage, they also take out a loan to purchase an asset that will generally increase their equity.
The good news is that most people can borrow like a rich person. The key is to use debt as a tool to strategically improve your personal finances, rather than relying on high interest consumer loans to cover unnecessary expenses or purchases. While it may be easier said than done, it is possible for people to achieve this by living on a budget and looking at the types of mortgages that are affordable and easy to qualify for.