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Consumers Using Credit Cards To Stay Afloat, Survey Finds

Safety net has become a trap

By Mark Huffman
ConsumerAffairs.com

July 29, 2009

The national survey examined credit card debt among low- and middle-income households--those whose incomes fell between 50 percent and 120 percent of local median income. It provides new information about why households are in credit card debt, how long they have carried their debt, and the impact this debt has had on their economic security.

The group says credit card debt in America has quadrupled since 1989 and increased 41 percent just since 2000. Americans now owe over $1 trillion in credit card debt, owing largely to job instability and medical costs, and personal bankruptcies rose from 673,615 in 2007 to over 1.2 million in 2009.

"American families are facing financial hardship not experienced for generations, and we’ve commissioned these surveys to tell us precisely why households are turning to credit cards so often" said Tamara Draut, Vice President of Policy and Programs at Demos and co-author of the report.

According to the survey:

• The average amount of time that households reported being credit card indebted is 5.1 years.

• 3 out of 4 low- and middle-income households reported using their credit cards as a safety net--relying on credit to pay for car repairs, house repairs, layoff or job loss, money given or loaned to relatives, college expenses or starting or running a business.

• More than 1 out of 3 households reported using credit cards to cover basic living expenses, on average for 5 out of the last 12 months.

• The most important predictor of higher "debt-stress" levels was whether a household relied on credit cards to cover basic living expenses such as rent, mortgage payment, groceries, utilities or insurance.

• For 1 in 2 households out-of-pocket medical expenses contributed to a families’ credit card debt, with an average of $2,194 dollars related to out-of-pocket medical expenses.

• The average interest rate paid on a families' card with the highest balance was 14.8% with close to 1 in 4 indebted households paying more than 20% interest on their card.

"The Plastic Safety Net" also reports that Americans are increasingly relying on credit cards to pay for essentials as wages no longer cover expenses:

• In the past five years credit card indebted homeowners used an average of $14,344 in home equity to pay down credit card debt.

• The majority of credit card indebted households cited using tax refunds toward debt reduction and nearly half of respondents cited working extra hours or taking on an extra job in order to get out of debt.

From now on, consumers will have a much harder time using credit cards to finance medical expenses and day to day bills. In recent weeks credit card companies have tightened credit, raising interest rates and minimum monthly payments, and in some cases, closing accounts. Even this admittedly bad option will no longer be available for millions of people.

"For a long time families have been using credit cards as a safety net in absence of stronger social policies and federal regulation—a condition exacerbated by today’s recession," said report co-author Jose Garcia, Associate Director of Research and Policy in Demos’ Economic Opportunity Program. "With so many American households putting their basic necessities on credit cards and using their limited home equity to pay it off, if they have any equity at all, we have a nation with millions on the financial edge."

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