What is consumer debt?

Consumer debt refers to the amount individuals owe as a result of borrowing money specifically for personal, household, or consumption purposes. This includes debts incurred from loans and credit cards that are used to purchase consumer goods and services, such as buying a car, financing a vacation, or accumulating costs from daily expenses. This type of debt does not typically include debt incurred for investment purposes, such as borrowing to buy stocks or real estate intended for income generation.

Understanding consumer debt is crucial because it directly impacts personal financial health; high levels of consumer debt can lead to financial strain, affecting a person's ability to save and spend wisely in the future. It is also distinct from savings, which represents money that is set aside for future use or emergencies, and from credit limits, which denote the maximum amount that can be borrowed.

The relevance of consumer debt in personal finance lies in its potential to affect credit scores and overall financial well-being, emphasizing the need for careful management and responsible borrowing practices. This understanding helps individuals make informed decisions about their finances and avoid the pitfalls of excessive borrowing.