Low- and Middle-Income Families Hit Hard by Credit Card Trends
Two new studies give a clearer explanation of the effects of the credit card crisis: banks are tightening credit card lending standards at a time when more households are depending on credit cards to get them through the month.
The Office of the Comptroller of Currency recently released its 2009 Survey of Underwriting Practices, which shows that 68% of lenders tightened credit card underwriting standards, almost double from the 2008 survey (35%).
A Demos survey released this week shows that more than one-third of low- and middle-income households used credit cards to cover basic living expenses (including rent, mortgage payments, groceries and utilities) on average in five of the last 12 months.
These statistics again show how difficult the credit situation is for both issuers and credit cardholders. Credit card issuers look at the present and future and see increased risk of defaults and more loan losses, so they tighten their credit standards and raise their rates. This hurts the low- and middle-income households who are using their credit cards just to make it through the month.
According to the Demos study, 1 in 4 of these indebted households are paying more than 20% in interest rates on their credit cards. This makes a bad financial situation much worse. Many households are using credit cards not only for emergencies, but to fill the gap left because their wages or retirement benefits aren’t enough. They can’t afford their bills, and high credit card interest rates certainly aren’t helping.
The Demos study, “The Plastic Safety Net,” examined credit card debt among low- and middle-income households (defined as income between 50% and 120% of the local median income). Some of the findings include:
* For almost half of these households, out-of-pocket medical expenses contributed to a family’s credit card debt, with an average of $2,194 related to out-of-pocket medical expenses.
* Consumers in these households paid an average interest rate of 14.8% on their credit card. Almost 1 in 4 of these indebted households paid more than 20% interest on their card.
* 3 out of 4 low- and middle-income households use credit cards as a safety net to help pay for car repairs, house repairs, college expenses, or starting or running a business.
* In these low- and middle-income households, cardholders 65 and older had an average credit card debt of $10,235 in 2008, up 26% from $8,138 in 2005.
Indebted households don’t have much reason to hope for relief, even with the Credit CARD Act and consumer regulations that go into effect next year. According to the Survey of Underwriting Practices, examiners expect credit risk to continue to increase over the next 12 months at 87% of the banks, particularly in home equity and credit card portfolios.
Increased risk and uncertain economic conditions are some of the primary reasons that issuers increase rates and fees, especially for anyone they consider to have less than excellent credit. So, low- and middle-income households can expect issuers to continue pricing for this. Households shouldn’t look for government regulations to provide real assistance with debt problems. A better option is working with a reputable credit counselor to help create a plan to get out of debt. The National Foundation for Credit Counseling is a good place to start.