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When Borrowing Isn’t Saving: The Complications of Credit Card Debt for the Poor

Catherine Ruetschlin

There is nobody like a mom in the low-wage service sector to demonstrate the day-to-day meaning of financial responsibility. But for the large number of households facing stagnant incomes, erratic schedules, and a rising cost of living, making a monthly budget doesn’t guarantee meeting it. When paychecks and savings don’t cover the bills, low- and middle-income households with credit cards often turn to plastic just to get by. Credit cards thus provide a critical service for American families as they are increasingly underserved by labor standards and social supports. 

Here at Demos, we’ve documented the cost of that plastic safety net when credit takes the place of adequate incomes, affordable medical care, and opportunities to build assets for households, the unemployed, older Americans, African Americans, and students and their families.

And that’s why the conflation of borrowing and saving in Sunday’s New York Times Magazine misses the mark. In that article, How Credit Card Debt Can Help the Poor, Shaila Dewan highlights Twin Accounts—a savings and credit-building vehicle offered by community development organizations and banks that match deposits made into a savings account and simultaneously establish credit history. Twin Accounts address some of the more damaging financial problems that accompany income instability—high costs and exclusion from even non-financial opportunities. 

As Dewan correctly notes: 

Life without credit is not only expensive; it’s also potentially ruinous. The most desirable apartments are off-limits, because their landlords run credit checks. Without credit, you have to make large deposits to turn on your electricity or gas or to put your phone bill in someone else’s name. If you want to buy a car, and you have good credit, a $10,000 loan might cost you $1,300 in interest. With bad credit, you’ll pay $7,600. If that car breaks down, a $500 expense might mean a crushing payday loan, or even a lost job.

She then makes the case that the extension of credit history into access to basic services, employment, and low cost financial products, means that responsible borrowing and a good credit history are just like assets for America’s poor.  

Dewan characterizes a Twin Accounts lender with the following epiphany: “Saving and responsible borrowing, Lowitz realized, amount to the same thing: putting aside small sums to reach a goal.” Given the preceding account of the mission creep of the credit reporting industry, the suggested goal of responsible borrowing is access to the same basic opportunities as every other consumer in the market. 

But saving and borrowing are not the same thing, though Twin Accounts, with an explicit goal of credit-building for the financially underserved, offers an opportunity for both. The generalization of this statement to credit cards (attempted only tenuously in the article) requires attention to a few important facts. 

First is that 40 percent of low- and middle-income households who carry credit card debt do so because they do not make enough money in their paychecks to meet their basic needs. The actual credit card usage of these households reflects basic income insecurity and the growing schism between an expanding economy and the typical American household. Access to credit cards, then, is important because America’s economic growth isn’t benefiting Americans broadly—but credit cards are just a superficial and short-term means of dealing with that problem, rather than a real opportunity for families to get their finances on track. 

Secondly, the use of credit history to determine more and more aspects of our economic lives is an inappropriate application of a tool that is demonstrably inaccurate, unfair and unsuitable for many of the uses to which it is applied. Rather than indicating trustworthiness or responsibility, credit reports often simply reproduce the racial and economic inequalities that already exist in other markets. According to the Federal Trade Commission, 1 in 5 Americans has a material error on a credit report.  African Americans and Latinos are disproportionately likely to have lower scores, an outcome that is associated with historical exclusion from wealth accumulation and labor market opportunities. Twin Accounts provide a means to surmount the barriers established by the mission creep of the credit reporting industry. These are barriers that in many instances (employment decisions, for example) should be eliminated altogether. 

Finally, families should not have to rely on credit cards to supplement poverty-level wages and a lack of social support. But since they do, it is especially important to ensure that credit markets are fair and transparent. The 2008 CARD Act showed that consumer protections from onerous practices can benefit households without subverting the credit industry. This success can be extended to ensure fair, non-predatory practices in credit card lending and to establish appropriate financial services guidelines in other markets for debt.