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It’s a common misperception that people amass credit card debt because they use their credit cards indiscriminately for frivolous purchases. However, according to a new report released in July 2009 by the non-profit research and advocacy group Demos, the story is not that simple. Rather, credit card debt more often accumulates when people are forced to turn to plastic to cover basic living expenses and medical costs.
The report was based on a phone survey conducted from April through August 2008, which gathered data from 1,205 low- and middle-income households with income of $50,000 or less. According to the survey, even before the economic downturn intensified, millions of consumers were having trouble meeting their daily expenses. Seniors participating in the survey were particularly hard hit by rising credit card debt. Their outstanding credit card balance increased 26% in just three years from $8,138 in 2005 to $10,325 in 2008.
The 35-40 age group had the second largest average credit card debt at $10,514, a 7% increase from 2005. People in the low- to mid-income segment aged 50-64 averaged $9,342 in credit card debt, also a 7% increase, while the 18-34 year-old segment stayed steady from 2005 to 2008, at $9,111 average debt.
Medical expenses were a major contributing factor to the credit card debt of both insured and uninsured cardholders. More than half of cardholders carrying a balance for more than three months said that medical expenses had contributed to their credit card debt.
The survey demonstrates that even before the economic crisis intensified in the fall of 2008, low- and mid-income households were forced to turn to plastic to make ends meet. Unfortunately, this segment of cardholders is also more likely to be hit with higher credit card interest rates. Almost one fourth of those surveyed paid at least a 20% APR on their outstanding balances; for black and Latino cardholders, this percentage rose to one in three.
Half among those surveyed who owned a home had tried to take out a home equity line of credit to pay off their credit card debt or refinance their home with a cash-out, options that are harder to get approved for in today’s climate of tightened lending practices and declining home values.
The full report can be viewed on the group’s Web site at www.demos.org.
