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Recent reports seem to show Americans are flexing their willpower when it comes to their debt load and credit card spending.
While that may sound like good news, it may be masking underlying problems, researchers have found in a new study.
Promising numbers
In its May 2012 Plastic Safety Net survey, research and advocacy company Demos surveyed 997 low- and middle-income American households that carried credit card debt for three months or more — and looked at how the recession and the Credit CARD Act of 2009 have affected American households.
First, the good news.
Average consumer credit card debt totaled $7,145, down from $9,887 in 2008, Demos found. That echoes the optimistic numbers from the New York Federal Reserve’s latest Household Debt and Credit report — which found that consumer debt fell 0.9 percent, mortgage balances dropped by 1 percent and balances on home equity lines of credit fell 2.4 percent in the final quarter of 2011.
Demos also found that the CARD Act seems to be working — for some. It’s doing what it’s intended to do, according to the study, which is to reduce fees and help people understand statements and pay down their balances faster. Fewer people made late payments, and those who did were a lot less likely to see their interest rate increase as a result.
The study also found over-the-limit fees had been virtually eliminated by the CARD Act and that the elimination of those fees really benefited certain minority groups — African-Americans and Latinos primarily.
The troubling truth
But those numbers don’t tell the whole story, say Demos researchers.
The company looked at how consumers are using their credit cards and found that in 2012, people continue to rely on their credit cards to pay for financial necessities, such as rent or mortgage bills, groceries, utilities or insurance because they don’t have enough in their checking or savings accounts.
Researchers had expected the numbers to come down from the previous survey, which was done in 2008 at the height of the recession, but that wasn’t the case, says Demos senior policy analyst Amy Traub.
“There had been so many reports about households deleveraging — borrowing less — and we did find less borrowing, but at the same time we found that about the same percentage — 40 percent — were using credit cards to pay for basic living expenses,” Traub says.
That suggests there’s more going on here than a temporary economic glitch, she says.
Caught in a debt cycle
So why are Americans so strapped for cash? The survey showed that a combination of medical bills, unemployment and low wages were among the biggest factors pushing up credit card debt.
Nearly half of the households surveyed were amassing debt from out-of-pocket medical expenses on their credit cards. The average amount of that medical debt was $1,678. Households that were uninsured were much more likely to have medical debt and to have more of it, but even households with insurance had debt because insurance doesn’t always cover everything, Traub says.
Then there’s the nation’s unemployment rate — hovering now at just above 8 percent. Eighty-six percent of households that had to pay for expenses due to unemployment in the past year added credit card debt as a result.
Finally, deeper problems of wage structures and weak job creation are keeping people from getting ahead of their debts. According to the Economic Policy Institute, wages fell among every entry-level group, regardless of education, from 2000 to 2011.
While credit card terms have improved because of the CARD Act, this cycle of interacting factors keeps consumers reaching for their cards to cover day-to-day expenses.
“What you can’t expect a piece of consumer legislation to do is to really get at this underlying relationship of people in debt,” Traub says. “And that’s really a deeper problem of wage stagnation — the fact that wages have not increased and for many people have decreased — and of unemployment.”
What’s the solution?
There’s more feeding the debt problem than lack of discipline or education, says Tahira Hira, professor of personal finance at Iowa State University.
Credit cards are for many, especially the unemployed, the only way to have access to funds. As a society, we have inadvertently turned them into a vehicle for high-cost borrowing, she says. You can’t get a bank to give you money for food and rent, so credit cards are one of the few ways to give yourself that money. As long as you’re making the minimum payments, you have access to that funding source, though it’s a costly source.
But Hira isn’t advocating that people ditch their cards.
“Our concern with credit cards is not that people shouldn’t be using them, but that they should use them effectively,” she says.
During the financial crisis, credit got tighter. In the Demos report, nearly 40 percent of households have experienced that by having their cards canceled, credit limits reduced or their credit applications denied. And nearly half — 48 percent — of those households with more limited access to credit cut the spending they would otherwise have charged to their credit cards.
Yet although lower credit limits might force households to control their spending, they create another problem, says Hira.
“If we unreasonably tighten the flow of funds from people who can use it smartly and productively and leverage it … then we are standing in the way of prosperity,” she says.
“But if we do it too leniently we make it too easy for them to hang themselves — and that is not right either.”
The answer to reverse consumers’ reliance on plastic for basic needs lies in finding the right lending and borrowing balance, Hira says, along with a fundamental strengthening of the jobs and wages outlook.
Traub agrees.
“The ideal to me,” she says, “would be to have an American society where people are able to earn enough to make ends meet and don’t need to rely on credit cards.”
