Out of Work and Into Debt: Why the "Plastic Safety Net" Isn't Enough

What would you do if you were laid off from a job? While you looked for a new position, you’d likely cut expenses as much as possible and begin drawing on any savings you have to pay the bills you can’t avoid. As time went on, you might turn to family, friends, and community institutions for assistance. With luck, you’d qualify for federal unemployment insurance benefits, and the $300 a week on average that they provide would be a critical support. At the same time, you might wind up putting groceries or gas on your credit card -- and then having trouble paying that bill. You wouldn’t be alone.

New findings from Demos’ 2012 National Survey on Credit Card Debt of Low and Middle-Income Households reveal that job loss is a leading contributor to credit card debt, and the debt accumulated can take years to pay off. A quarter of all low- and middle-income households with credit card debt reported that they had accumulated their debt as a result of a job loss. Among households with members who have been unemployed in the past three years, 34 percent say that expenses relating to job loss are the single biggest contributor to current credit card debt.

We also find that households with members who have been unemployed in the past three years have credit card balances that average $100 more than those who have not experienced household unemployment. Unemployed households also pay average credit card interest rates seven percent higher than households that haven’t been impacted by unemployment. Over time, higher rates can lead to thousands of dollars in extra interest payments—even on credit cards that have since been cancelled.

Since households experiencing unemployment are more likely to pay credit card bills late and have difficulty paying off other debts, they also tend to have worse credit. Having poor credit can impose higher costs and reduced economic opportunities for years to come: causing a consumer to end up paying more for loans and insurance, have difficulty renting an apartment, or even be turned down for a future job.

Americans shouldn’t have to rely on a “plastic safety net” of credit card debt to make ends meet – we should have a genuine, public safety net to provide support when we’ve fallen on hard times. Clearly the unemployment insurance system is failing to adequately sustain out-of-work Americans and should be strengthened. But instead, we face the danger of cuts.

If unemployed workers and their families need credit cards to make ends meet even when unemployment benefits are available, imagine how bad things could become if the benefits expired. As Ilana Novick noted on this blog last week, unemployment benefits for approximately 2.1 million Americans who have been out of work for more than six months are set to expire at the end of December unless Congress acts to extend them. There are many well-documented reasons to extend benefits: avoiding an increase in household indebtedness – with all of its long term consequences – is yet another.

For more details, read the new policy brief from Demos and the National Employment Law Project.