Credit Card Debt Continues to Hobble the Poor

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NEW YORK (MainStreet) — Americans in general are doing a better job handling their credit cards, but one demographic hasn’t stopped the credit card spin cycle, and that’s low-income Americans. They’re still using credit cards for basic expenses, which is a one-way ticket to debt.

Since 2008 balances for all cardholders have fallen for 27 straight months. The total U.S. revolving debt for all consumers (98% credit card-related) stands at about $794 billion, according to the Federal Reserve’s G.19 report.

The good news is that the number is down from $800.7 billion in December 2010, but the drop is not coming from Americans with lower incomes, at least not as much as their more affluent counterparts, according to a new study called “Understanding the Debt Difference" from research firm Demos.

According to Jose Garcia, associate director for research and policy, and Jennifer Wheary, senior fellow at Demos, poorer consumers have stopped using credit cards to buy goods and services as a convenience, and aren’t paying their bills in full every month to avoid the high interest charges. Instead, lower income consumers are using credit cards “as a lifeline.”

Garcia and Wheary elaborate in the report:

"Many low-and middle-income families turn to credit cards to meet basic expenses when an unforeseen crisis hits — such as a job loss or medical emergency. The additional credit card debt these families take on further inhibits their ability to save. An ongoing lack of savings makes them more likely to have to resort to credit cards — and perhaps more desperate measures — when future crises arise. The end result is an ongoing cycle of economic vulnerability," the report explains.

Typically, less affluent Americans fall behind on their credit card bills because of unforeseen circumstances like the loss of a job or a health issue. Garcia and Wheary call these “economic shocks” and compare how they impact “indebted” versus “non-indebted” families:

  • Working-age indebted families were more likely than non-indebted families of working age to be unemployed for at least two months in the last three years¿.
  • 37% of working-age indebted families suffered from unemployment in this time frame versus 22% of non-indebted households¿.
  • More than one in three indebted families (39%) had at least one member of the household who lacked health insurance in the last three years; for non-indebted households, the figure was 25%¿.
  • 44% of indebted households (versus 36% of non-indebted households) faced a major medical expense in the last three years.

Is there any way out of the credit card mess for less affluent consumers? Demos takes a stab at the question, but its solutions don’t seem high on Congress's or the White House’s priority list, especially as both continue to haggle about the country’s debt and budget.

For the record, Demos calls for a few measures to help lower-income credit card holders get back their financial footing: Increase household savings, strengthen social insurance protections and ensure fair lending practices.

These policy reforms would help millions of American families step out of the revolving door of debt once and for all, they say. But it won't be easy.

There’s no magic wand Uncle Sam can wave to hike consumers' household savings – and especially not with the government’s own debt headache dominating the headlines.

Strengthening social insurance programs is a noble thought – but the government can’t afford to raise taxes with the economy so fragile right now. Fair lending is another good idea, but the reality among banks and lenders these days is “no lending,” not "fair lending." Credit has rarely been tighter in U.S. history than it is right now.

Demos is on the money by noting the burgeoning credit card problem among the nation’s less affluent citizens. But aside from a stronger economy and a better jobs climate, there doesn’t seem to be a way out.

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