Text size

The rich borrow money, too. So says the Federal Reserve in a blog post published early in November. The oft-talked about 1% hold almost 5% of total personal debt in America—more than their fair share—according to Federal Reserve Economic Data, or FRED.

That might seem counterintuitive. Why would the rich need to borrow money? After all, they are wealthy. A couple of reasons are obvious from the data. A couple aren’t. What’s more, some of the implications from rich-American borrowing patterns are worth considering for everyone else.

Poorer households are less likely to own a home, according to the Fed. That’s no surprise. Households in the bottom half of wealth hold about 36% of home mortgages. The top 1% hold more than 4% of all residential mortgage debt in America.

Mortgages are a big reason the 1% have debt. That also shouldn’t be a surprise. Mortgage interest is tax deductible, to a point, and the 1% pay higher marginal tax rates. The deductions are a bigger deal for richer households. No one likes to pay taxes, even if it means paying some interest on a mortgage loan.

The poorest households hold less than their fair share of mortgage debt, but they hold more than their share of consumer debt. The bottom half of households by wealth hold almost 54% of consumer debt. Consumer debt includes credit cards, student loans and car loans. That distribution isn’t a surprise, either.

What is a surprise from the consumer-debt data is that the richest 1% of households hold 2% of consumer credit. Why would the richest Americans have a credit-card balance? The answer is probably in the way the data is counted. About 7% of all consumer credit counted by the Fed includes credit balances paid in full—that incur no monthly finance charges. It is very likely the rich aren’t carrying credit-card balances. It’s just easier to shop with plastic and pay the balance off when it is due.

The FRED data show that rich households aren’t averse to some borrowing. That’s one lesson—borrowing is OK, to a degree. The top 1% have about $700 billion in borrowing. The top 1% are worth about $25 trillion in aggregate. Debt is a fraction of their total assets.

Newsletter Sign-up Review & Preview Every weekday evening we highlight the consequential market news of the day and explain what's likely to matter tomorrow. PREVIEW

And the 1% seem to borrow only to fund tax-advantaged, appreciating assets. And over the long run, housing prices have increased.

Poorer households, on the other hand, rely on debt to pay for post-high school education and transportation, while carrying credit-card balances. Unlike housing, cars aren’t an appreciating asset.

So the rich don’t fund consumption with debt and they don’t borrow to buy depreciating assets. Those are two simple, prudent lessons for anyone learning to handle debt. Good lessons, but if only it were that easy to manage household liabilities when not in the upper 1%.

Write to Al Root at allen.root@dowjones.com