Growing Consumer Reliance on Credit Cards: Are More Lower- and Middle-Income Consumers Relying on Their Credit Cards to Cope with Rising Energy and Food Prices?

Article excerpt

At one time consumers might have used the option of refinancing their homes or tapping a home equity line of credit to increase cash flow to temporarily make ends meet. But more stringent credit standards and falling home prices have locked many families out of that market. Some experts believe Americans are now turning increasingly to high-priced credit cards as an alternative.

A recent report by the Center for American Progress cites a Boston Globe article that states direct mail credit card offers aimed at subprime customers jumped 41 percent in the first half of 2008 compared to the first half of 2006. During the same time the April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices conducted by the Federal Reserve indicates that most mortgage lending became more stringent. About 60 percent of senior loan officers had tightened lending standards on prime mortgages and almost 77 percent had made subprime mortgage standards more rigorous.

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Credit card balances climb

Credit cards, once seen as a convenient short-term loan or as a fallback for emergencies, are becoming increasingly a financial coping strategy. According to the 2007 Demos report entitled Borrowing to Make Ends Meet: the Rapid Growth of Credit Card Debt in America, credit card debt has risen 315 percent between 1989 and 2006.

As of 2006, approximately six out of every ten households using credit cards rolled forward their balances, and 35 million Americans made only minimum payments each month. The median household credit card debt was up from $2,768 in 1989 to $5,219 in 2004, an increase of 89 percent (shown in 2004 dollars). In this period, credit card debt for lower-income households increased fourfold. These households use approximately 40 percent of their income to service debt compared with average credit card holders who use 21 percent.

According to the Demos study, African American and Hispanic households are also more likely to carry credit card debt. Compared to 54 percent of Non-Hispanic White households, 84 percent of African-American and 79 percent of Hispanic households carry credit card balances.

White households carry higher credit card debt overall, but African Americans and Latinos use more of their available credit balance. African Americans use 84 percent of their available balance and Latinos 79 percent compared with 53.7 percent for Whites. Higher balances across the board may reflect increases in late fees and cash-advance surcharges assessed on the cards: from 1989 to 2004 the number of accounts accruing late fees of 60 days past due or more rose from 4.8 percent to 8 percent of total cardholders.

American seniors are also racking up credit card debt. More than 35 percent of older adults are now managing credit card debt, and their average balances ballooned 194 percent from $1,169 in 1989 to $4,906 in 2004 (both shown in 2004 dollars). This debt appears more problematic in light of the fact that the 2004 median income of individuals 65 and older was $15,199. Nearly 40 percent of these seniors were living below the poverty line.

Fatal attraction

What factors are driving Americans to precariously high levels of credit card debt? Part of the explanation is that it's so much easier to get credit cards and use them.

The author of Going Broke: Why Americans Can't Hold On to Their Money, Connecticut College psychology professor Stuart Vyse, cites consumer behavior as part of the problem. "We have the ability to buy things at home, on the Internet, through television, through 800 numbers, and with cell phones and portable devices, it's much easier to do that. Thirty years ago if you wanted to buy something you had to go to town and you had to have the money," Vyse stated in an interview with ABC News.

Easier access to credit is another exacerbating factor. Whereas in the past banks only provided credit cards for customers with stable credit histories, the industry has now been able to broaden access through innovations in the underwriting of credit risk. …