Credit Cards
Creative Commons License photo credit: Andres Rueda

I’m a fan of having access to plenty of low-cost credit—as a proxy for an emergency fund while you’re building one, and to supplement your cash once you’ve got several months’ worth of expenses set aside. The future is uncertain, after all, and you can never tell when a cascade of events will wipe out your reserve.

What’s worrisome is that so many people never get beyond relying on their plastic as their only source of funds for unexpected emergencies—or even relatively predictable events like car and home repairs.

The national research center Demos recently published its second survey examining credit card debt among low- and middle-income households, which it defined as households whose incomes fell between 50% and 120% of the local median income.

“The Plastic Safety Net: How Households are Coping in a Fragile Economy” blows it in one sense by citing an “average” debt of $9,827 for these households. If you’ve been reading me awhile, you know how deceptive these “averages” are, since they’re skewed by big balances owed by a relatively small number of households.

A better measure of household debt uses medians, which describe the halfway point—half of the surveyed population owes less, half more.

The latest figures available from the Federal Reserve show that only 25.7% of the lowest-income households, 39.4% of lower middle income and 54.9% of middle income households have any credit card debt. Of those who have credit card debt, the median balances are $1,000, $1,800 and $2,400, respectively.

The other data Demos cited, though, was revealing. Particularly:

•    3 out of 4 low- and middle-income households reported using their credit cards as a safety net–relying on credit to pay for car repairs, house repairs, layoff or job loss, money given or loaned to relatives, college expenses or starting or running a business.

•    More than 1 out of 3 households reported using credit cards to cover basic living expenses, on average for 5 out of the last 12 months.

•    The most important predictor of higher “debt-stress” levels was whether a household relied on credit cards to cover basic living expenses such as rent, mortgage payment, groceries, utilities or insurance.

•    For 1 in 2 households out-of-pocket medical expenses contributed to a families’ credit card debt, with an average of $2,194 dollars related to out-of-pocket medical expenses.

•    The average interest rate paid on a families’ card with the highest balance was 14.8% with close to 1 in 4 indebted households paying more than 20% interest on their card.

•    In the past five years credit card indebted homeowners used an average of $14,344 in home equity to pay down credit card debt.

•    The majority of credit card indebted households used tax refunds toward debt reduction and nearly half of respondents worked extra hours or took on an extra job in order to get out of debt.

That last finding shows most households realize they have a serious problem and are trying to do something about it.

Demos’ recommendations to reduce dependence on high cost debt include:
1.    Promote increased savings, not increased debt, to help families meet unexpected financial emergencies.
2.    Modernize the unemployment insurance system and expand coverage and benefit levels.
3.    Strengthen the position of low-wage workers in the labor market.
4.    Address rising health care costs and the growing number of uninsured.
5.    Establish a new agency focused on consumer financial protection.

I think numbers 2 and 3 are longshots, particularly in this economy, but 4 and 5 are in process and the first suggestion–promoting savings rather than plastic–has always been a good idea.

If you want to break your own dependence on plastic, read the following:

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