Luxembourgers accumulate the most consumer debt in Europe

When we talk about 'debt in Luxembourg', we often think about housing, but consumer debt related to the purchase of cars, or unforeseen work on your home, or 'treating yourself' is also important to consider. All of these bits and bobs can quickly take a toll on your finances, especially as interest rates on loans are high at the moment.

In Luxembourg, a significant proportion of the population falls for this trap to the point that Luxembourg is the European country "where consumer debt is most widespread among low-income households", as the Central Bank reports in a recent publication.

This consumer debt, held by 35% of households, is more common than mortgage debt (held by 31% of households). More than 13% of households hold both mortgage debt and consumer debt.

Many go into debt to buy a car

The main source of consumer debt is personal loans, held by 26% of households in Luxembourg (20% in the eurozone). Among the lowest 20% of households, the average personal loan debt in Luxembourg is three times higher than eurozone averages.

Personal loans, on average, represent only 16% of gross household income in Luxembourg, which is on par with the eurozone (17%).

Interestingly, around 70% of Luxembourgish households cite the purchase of a vehicle as the main reason for their personal loan, compared to 38% of households in the eurozone. This difference provides another explanation for the higher level of personal loans in Luxembourg.

Are credit cards really the most rational choice?

A second major factor for consumer debt is credit cards. Nearly 84% of Luxembourgish households have credit cards, almost twice as many as in the eurozone. However, only 5% of households use these cards to accumulate debt, in Luxembourg as in the eurozone. In general, the likelihood of owning a credit card increases with household income and level of education. This probability also increases among households that consider themselves subject to credit constraints (around 7% of households in both Luxembourg and the eurozone).

According to 2018 HFCS data, over 90% of households with accumulated credit card debt had positive balances on their bank accounts. More than 70% of these households had enough money to pay off their credit card debt. "This behaviour seems irrational when you compare the very high interest rate households pay when they accumulate credit card debt with the low returns they earn on their current and savings accounts". The results indicate that "this behaviour may be explained by differences in risk aversion and fears of a future tightening of their access to credit".