October 14, 2005
Living off Credit Cards
Credit cards cover living expenses for many
Americans' penchant for charging up a storm on their credit cards often has more to do with basic necessities than with a lust for the latest consumer goods, according to a survey released this week.
Seven out of ten low- and moderate-income households said they use credit cards to cover basic living expenses such as car repairs, utility bills, groceries or house repairs, according to the telephone survey of 1,150 adults who had owed credit-card debt for at least three months.
One-third of the consumers said they used their credit cards for basic necessities on average four out of the last 12 months. Only 12% of those surveyed said they never used credit cards for basic living needs.
The average level of credit-card debt among those surveyed was $8,650. Twenty-nine percent had credit-card debt topping $10,000, while another 31% said their credit-card debt was less than $2,500.
But, when asked about their payment intentions over the next three months, some appear determined to pay down debt: 41% planned to pay two to three times the minimum due, 39% said they'd pay the minimum plus a little extra, while 10% said they'd pay the minimum.
Often, credit-card charges were spurred by a medical emergency or a job loss, according to the survey conducted by ORC Macro for Demos, a nonprofit advocacy group that looks at economic opportunity, and Center for Responsible Lending, a nonprofit advocacy group focusing on predatory lending.
Consumers who suffered a recent job loss or who didn't have health insurance in the last three years were almost twice as likely to turn to credit cards to cover their essential needs.
Job loss and medical expenses "are the two biggest predictors of which households are going to have higher relative levels of debt," said Tamara Draut, a co-author of the report and director of the economic opportunity program at Demos, in New York.
But even those families that didn't suffer emergencies felt the need to turn to plastic to pay for living expenses, she said.
There's "a fundamental mismatch in the economy, where wages aren't keeping up with the cost of things like health care, child care, housing," Draut said.
"We have a lot of families living paycheck to paycheck. Any time something unexpected happens, whether it's an illness or a car breaks down or a furnace breaks down, they turn to credit cards to keep things running," she said.
Survey respondents earned 50% to 120% of their county's median income, with annual incomes of some as high as $75,000, said Ellen Schloemer, a co-author of the report and research director at the Center for Responsible Lending, in Durham, N.C.
Refinancing gone awry
Forty percent of the homeowners in the survey refinanced their home mortgage or took out a home-equity credit line in the past three years, and over half of these homeowners used the money to pay down credit-card debt.
But most of them quickly beefed up that debt again.
On average, homeowners who refinanced to pay down their credit cards still owed $14,419 on those cards versus the $8,810 owed on average by homeowners who refinanced but didn't pull out cash to pay off debt.
The group that refinanced to pay down debt also owed more on their mortgages: $111,460 on average versus an average mortgage of $99,338 among homeowners who refinanced without pulling out equity.
According to the survey's authors, the homeowners resorted to charging more credit-card debt, even after they had worked to pay a chunk of it off, because they faced basic needs they couldn't afford without the plastic.
"A lot of the difference between a family getting ahead and a family really struggling is misfortune and chance. The homeowners that had [beefed up their credit-card debt again] we're more likely to have a job loss and more likely to report a major illness in the family," Draut said.
Cap on interest rates?
The study's authors say more generous unemployment insurance and greater access to health insurance would go a long way in reducing consumers' reliance on credit cards, but they'd also like to see more laws governing credit-card issuers, such as a cap on interest rates. See related story on 10 cards with the best terms.
"Probably the easiest [solution] to adopt would be changes to some of the credit-card policies that really disadvantage people, really lock them into a continuing trap of debt," Schloemer said.
"Is it really fair, if someone makes one late payment, to increase their interest rate from 12% to 25% on their whole balance, on everything they borrowed up till now, and by the way the late payment doesn't have to be on their credit card, it can be on their utility bill?" she said.
"As a society, we have to really encourage the idea that an alternative to short-term credit is savings," Schloemer said. "If people weren't paying on really high-interest-rate cards, they might actually be able to save some money. That's a much stronger safety net than credit cards."
Andrea Coombes is a reporter for MarketWatch in San Francisco.
Americans' penchant for charging up a storm on their credit cards often has more to do with basic necessities than with a lust for the latest consumer goods, according to a survey released this week.
Seven out of ten low- and moderate-income households said they use credit cards to cover basic living expenses such as car repairs, utility bills, groceries or house repairs, according to the telephone survey of 1,150 adults who had owed credit-card debt for at least three months.
One-third of the consumers said they used their credit cards for basic necessities on average four out of the last 12 months. Only 12% of those surveyed said they never used credit cards for basic living needs.
The average level of credit-card debt among those surveyed was $8,650. Twenty-nine percent had credit-card debt topping $10,000, while another 31% said their credit-card debt was less than $2,500.
But, when asked about their payment intentions over the next three months, some appear determined to pay down debt: 41% planned to pay two to three times the minimum due, 39% said they'd pay the minimum plus a little extra, while 10% said they'd pay the minimum.
Often, credit-card charges were spurred by a medical emergency or a job loss, according to the survey conducted by ORC Macro for Demos, a nonprofit advocacy group that looks at economic opportunity, and Center for Responsible Lending, a nonprofit advocacy group focusing on predatory lending.
Consumers who suffered a recent job loss or who didn't have health insurance in the last three years were almost twice as likely to turn to credit cards to cover their essential needs.
Job loss and medical expenses "are the two biggest predictors of which households are going to have higher relative levels of debt," said Tamara Draut, a co-author of the report and director of the economic opportunity program at Demos, in New York.
But even those families that didn't suffer emergencies felt the need to turn to plastic to pay for living expenses, she said.
There's "a fundamental mismatch in the economy, where wages aren't keeping up with the cost of things like health care, child care, housing," Draut said.
"We have a lot of families living paycheck to paycheck. Any time something unexpected happens, whether it's an illness or a car breaks down or a furnace breaks down, they turn to credit cards to keep things running," she said.
Survey respondents earned 50% to 120% of their county's median income, with annual incomes of some as high as $75,000, said Ellen Schloemer, a co-author of the report and research director at the Center for Responsible Lending, in Durham, N.C.
Refinancing gone awry
Forty percent of the homeowners in the survey refinanced their home mortgage or took out a home-equity credit line in the past three years, and over half of these homeowners used the money to pay down credit-card debt.
But most of them quickly beefed up that debt again.
On average, homeowners who refinanced to pay down their credit cards still owed $14,419 on those cards versus the $8,810 owed on average by homeowners who refinanced but didn't pull out cash to pay off debt.
The group that refinanced to pay down debt also owed more on their mortgages: $111,460 on average versus an average mortgage of $99,338 among homeowners who refinanced without pulling out equity.
According to the survey's authors, the homeowners resorted to charging more credit-card debt, even after they had worked to pay a chunk of it off, because they faced basic needs they couldn't afford without the plastic.
"A lot of the difference between a family getting ahead and a family really struggling is misfortune and chance. The homeowners that had [beefed up their credit-card debt again] we're more likely to have a job loss and more likely to report a major illness in the family," Draut said.
Cap on interest rates?
The study's authors say more generous unemployment insurance and greater access to health insurance would go a long way in reducing consumers' reliance on credit cards, but they'd also like to see more laws governing credit-card issuers, such as a cap on interest rates. See related story on 10 cards with the best terms.
"Probably the easiest [solution] to adopt would be changes to some of the credit-card policies that really disadvantage people, really lock them into a continuing trap of debt," Schloemer said.
"Is it really fair, if someone makes one late payment, to increase their interest rate from 12% to 25% on their whole balance, on everything they borrowed up till now, and by the way the late payment doesn't have to be on their credit card, it can be on their utility bill?" she said.
"As a society, we have to really encourage the idea that an alternative to short-term credit is savings," Schloemer said. "If people weren't paying on really high-interest-rate cards, they might actually be able to save some money. That's a much stronger safety net than credit cards."
Andrea Coombes is a reporter for MarketWatch in San Francisco.
# posted by Sponduliqs @ 9:23 AM 
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