New York, NY — As new unemployment figures show a still-staggering 9 percent of Americans out of work, a new report from the policy center Demos examines the degree that low income American families use credit to weather economic shocks, and draws out the impact of credit card debt on families' long-term financial stability.
Based on survey research commissioned by Demos, "Understanding the Debt Difference" compares two groups: an “indebted” and a “non-indebted” group. The "indebted" group is defined as those who had revolving balances on their credit cards for three months or more at the time of the survey, the "non-indebted" group did not carry a balance at the time of the survey.
The results show that the main difference between those families with credit card debt and those without is exposure to economic shocks such as job loss, loss of health insurance or unexpected medical expenses.
"Before the housing bubble burst and the recession set in, American families were already relying on credit cards just to get by,” said report co-author Jose Garcia. “Then the cost of living shot up and employment became more unstable."
"In the wake of losing their jobs or their insurance, many households had no other option to make ends meet, and credit cards became a lifeline. We are now starting to see the devastating effect of debt on these families,” Garcia said.
Key findings are listed below.
-- Working-age "indebted" families were more likely than "non-indebted" families of working age to be unemployed for at least two months in the last three years (37 percent versus 22 percent, respectively).
-- Thirty-nine percent of "indebted" families had at least one household member lack health insurance in the last three years. For "non-indebted" households the figure was 25 percent.
-- Forty-four percent of "indebted" households (versus 36 percent of non-indebted households) faced a major medical expense in the last three years.
-- One-hundred percent of credit card "indebted" households were paying other monthly financial obligations in addition to credit card debt at the time of the survey. These households were paying an average of $1,756 each month to meet these obligations.
-- "Non-indebted" households are more likely to be homeowners than "indebted" households.
-- Among homeowners with equity, credit card "indebted" households have 54 percent less home equity than non-credit card "indebted" households ($93, 564 versus $166, 997, respectively).
-- The majority of non-indebted households (83 percent) had at least one type of financial asset such as a checking or savings account, CD, stocks, pension plan, or IRA. On average, these households’ financial assets were valued at $53,949.
-- Surprisingly, a larger percentage of "indebted" households (96 percent) had at least one type of financial asset. However, among those "indebted" households with assets, the average value of those assets was $48,432–11 percent lower than "non-indebted" households.
-- "Indebted" households were also more likely to hold liquid assets such as savings or checking accounts. Eighty-two percent of "indebted" households held these liquid assets, compared to 79 percent of "non-indebted" households.
"The takeaway from this research is clear: Too many Americans lack an adequate safety net to weather economic storms and are forced to turn to credit just to weather them." said Jennifer Wheary, co-author of the report and a Senior Fellow at Demos.
"Many hard working Americans see their children’s hope for higher education, their ability to own a home and build assets, and their retirement security imperiled because of a growing debt burden.”
Members of Congress, and the leaders of the new Consumer Financial Protection Bureau, should work to understand the causes and serious longer-term effects of debt and seek to curtail them through meaningful regulation of the credit industry and the creation of a stronger social safety net which enable more personal savings. Implementation of 2010's health care reform legislation will also protect families from being dragged down by the costs of unexpected illness."
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