Consumer Debt Grew by $1 Trillion in 2021. Here's How to Manage Yours

Talk about a notable uptick.

Early on in the pandemic, many people had no choice but to cut back on spending to compensate for lost income and depleted savings. But things have improved tremendously since then, and in 2021, consumers did a lot more shopping -- and a lot more borrowing.

As a result, total U.S. household debt increased by $1 trillion in 2021, according to the Federal Reserve Bank of New York. That's the biggest annual increase since 2007.

In 2021's fourth quarter alone, consumer debt rose by $333 billion. And while mortgages and auto loans were the biggest drivers of that increase, credit card debt rose as well.

Is rising consumer debt a bad thing?

Yes and no. An uptick in consumer debt can actually be a sign of a healthier economy. When people have money to spend, they tend to borrow more. The fact that household debt rose in 2021 is indicative of how far the economy has come since the start of the pandemic.

On the other hand, household debt can generally be broken down into two categories -- healthy and unhealthy. Mortgages and auto loans fall into the former category, while credit card debt most definitely lands in the latter one. It’s not ideal that credit card debt levels rose.

Getting a handle on your debt

If you have a lot of debt and it's getting difficult to keep up with your bills, then it may be time to come up with a plan to reduce or eliminate some of it. This doesn't mean you have to push yourself to try to pay off your mortgage in the next year if you still have a decade left on that loan. Rather, you should focus on your unhealthy debts, like your credit card balances, since those are likely costing you the most in interest.

Plus, too much credit card debt can actually cause damage to your credit score. And if that number takes too heavy a hit, it can become more expensive to borrow for healthy purposes (say, replacing your aging car with a new one) as needed.

If you have a lot of credit card debt, see if there's a way to consolidate it and make it less expensive to pay off. That could mean doing a balance transfer or using a personal loan to pay off your credit cards.

It also pays to look at your healthier debts and see if there's a way to reduce your payments on them if they've become burdensome. That could mean refinancing your auto loan or even your mortgage. That said, with mortgage rates climbing, refinancing is becoming an increasingly less viable or appealing option for some borrowers.

The fact that consumer debt rose so much in 2021 really isn't all that surprising. But if you feel your debt has gotten out of hand, you should do what you can to make your payments more manageable so you don't fall behind and risk extreme credit score damage.