In times of economic hardship, people turn to family, friends — and credit cards.
This is the main conclusion of a study from Demos, a New York City–based research and policy development organization. And, increasingly, baby boomers aged 50 and up are carrying more credit card debt than their younger counterparts. Here's why so many are spending their golden years in debt, according to the study.
People fall into credit card debt not so much because of a lack of personal fiscal responsibility, but because they're dealing with the consequences of unexpected expenses or job loss.
The study surveyed 997 middle-income households that had carried credit card debt for three months or more in 2012. On average, boomers in the 50-plus age group had levels of credit card debt that were one-third higher (an average of $8,278) than those below 50 (an average of $6,258).
The reason? Credit cards increasingly have become part of the safety net boomers rely on in times of need.
For most, unexpected expenses were the largest contributor to credit card debt. According to the study, half of Americans over 50 with credit card debt carried medical expenses on their credit cards, with prescription medications and dental expenses the highest contributors. Other unexpected expenses contributing to card debt levels included car repairs (for 49% of those surveyed) and home repairs (for 38%).
In addition, about one in three of older Americans with credit card debt were using credit cards to meet basic living expenses, including rent or mortgage, food and utilities.
“I was struck by the proportion of people over 50 who are using credit cards to pay everyday expenses or to deal with medical bills or the effect of unemployment,” says study author Amy Traub, a senior policy analyst at Demos. “Increasingly, people over 50 are using their credit card to deal with hard times.”
For boomers having trouble making ends meet, job loss was often part of the problem. One in four of those surveyed said that loss of employment had contributed to their credit card debt, while 15 percent said that job loss was the single biggest cause. But boomers are also taking on card debt to help family members, such as children and aging parents. About 23 percent of boomers had increased their debt load to help relatives, compared to only 11 percent of those under 50.
Signs of trouble
Following the 2008 credit crisis, Americans have been steadily deleveraging, either by paying down debt or writing if off.
That's not the case for many boomers, however. While overall credit card balances fell 28 percent between 2008 and 2012 among low- and middle-income Americans with credit card debt, that decline differed significantly by age. Those under 50 reduced their credit card debt by 37 percent, while debt levels decreased only16 percent among those over 50 in the same period.
“Credit card debt, too often portrayed as a problem of irresponsible young people who get carried away at the mall, must now be recognized as a serious issue for people age 50-plus,” Traub says.
For middle-income 50-plus households carrying card debt into their retirement years, the study paints a troubling picture, according to Traub.
“So many people over 50 already use credit cards to get through the month, and now we're now talking about cutting social benefits,” Traub says. “I think this study really raises questions about the wisdom of cutting Social Security and Medicaid benefits, when Americans nearing retirement are already having to use credit cards to deal with the fall-out from major life events.”
If credit card debt for most people tends to result from unexpected life events, what can you do to protect yourself? Financial experts advise building up an emergency fund, so you have something to fall back on should unforeseen events occur.
Even if you already have credit card debt, prioritize putting money into an emergency fund, even if it is just a little every month. The idea is to end up with enough money to pay for three to six months of your living expenses — or enough to pay for an unexpected medical bill, car problem or home repair. Even if you have only enough to pay for part of an expense, it's better than putting the whole amount on a credit card, where it will cost you interest.
Of course, an emergency fund can only go so far when the unexpected happens, such as a medical emergency or illness. When debt becomes overwhelming, it may help to visit a nonprofit credit counseling service — affiliated with either the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. The counselors may be able to help you negotiate for lowered interest rates with your credit card issuers or help you determine if bankruptcy will provide you some relief.