New Survey Report Reveals Truth Behind Credit Card Debt Explosion in the U.S.

Citing Skyrocketing Costs, Dwindling Savings and Stagnant Wages, More American Families Are Turning To Credit Cards As Their Financial Safety Net


Center for Responsible Lending
October 12, 2005

Washington, D.C. — American families are turning to credit cards to make ends meet in an increasingly volatile economy, according to The Plastic Safety Net: The Reality Behind Credit Card Debt in America, a new report released today by Demos and the Center for Responsible Lending. Released just five days before the new bankruptcy law takes effect and effectively shuts the door on financial recovery for millions, The Plastic Safety Net presents new findings from a national survey on credit card debt among low- and middle-income households—those whose earnings fell between 50 percent and 120 percent of local median income. The survey provides new information about why households are in credit card debt, how long they have carried their debt and the impact this debt has had on their economic security.

Research shows that credit card debt in America has almost tripled since 1989 and increased 31 percent since 2000. Americans now owe some $800 billion in credit card debt. In addition, owing largely to job instability and medical costs, bankruptcies rose from 616,000 in 1989 to over 1.8 million in 2004.

However, too little is known about the causes of America’s household debt crisis. Existing data sources tracking debt, such as the Federal Reserve Board’s triennial Survey of Consumer Finances, provide limited information and do not answer basic questions about how long households have been in debt and about the type of charges that lead to outstanding balances. Prior to the survey findings presented in The Plastic Safety Net, there have been few studies that analyze how households are using credit cards and how they are managing their debt.

"American families are facing financial hardship not experienced for generations, and we commissioned this survey to tell us precisely why they are turning to credit cards so often" says Tamara Draut, Director of the Economic Opportunity Program at Demos and co-author of the report. "The results are clear: wages have stagnated while medical and housing costs have skyrocketed, and if confronted with a layoff or health emergency there are few, if any, personal or public safety nets adequate enough to help in a crisis. Households are turning to high-cost credit cards to keep afloat."

Key survey findings from The Plastic Safety Net:

  • $8,650 is the average credit card debt of a low- and middle-income indebted household in America.
  • 59 percent of respondents were in credit debt for longer than one year, with an average length of just over three and a half years.
  • Seven out of 10 low- and middle-income households reported using their credit cards as a safety net—relying on credit to pay for car repairs, basic living expenses, medical expenses or house repairs.
  • One out of three households reported using credit cards to cover basic living expenses on average four out of the last 12 months; households that reported a recent job loss or unemployment, and those without health insurance in the last three years, were almost twice as likely to use credit cards for basic living expenses.
  • 20 percent of survey homeowners had paid off some credit card debt with a mortgage refinance in the last three years, reducing their home equity $12,000 on average. Further, these households still had average credit card debt over $14,000. As a result, they were carrying 18% more debt than homeowners who had refinanced a mortgage but not paid down credit card debt—even though their incomes were almost identical. In other words, they were trading unsecured credit card debt for higher mortgage debt secured by their home.

The Plastic Safety Net also reports that, as Americans are increasingly relying on credit cards to pay for essentials that wages no longer cover, reliance on credit cards is having a multiplying effect that is creating millions of "debt-stressed" families:

  • 47 percent of households had been called by a bill collector.
  • Almost half missed or were late with a payment in the last year, with nearly a quarter of households reporting paying a late fee at least one or two times in the past year.
  • In addition to charging late fees ranging from $30 and $39, most issuers also penalize cardholders for late payments by increasing the interest rate on the account two- or three-fold, often after only one late payment. A household with the average amount of credit card debt in our survey ($8,650) would pay an additional $1,100 in costs each year if their card’s interest rate was increased from the typical 12 percent to the average 25 percent “default rate” for one late payment.

"Americans families are losing the fight against an economy and lending practices that are working against them," said Mark Pearce, President of the Center for Responsible Lending. "It’s time for Washington to address this crisis head-on and create policy that protects, and promotes economic vitality for, all American households."

Among the report’s key policy recommendations:

  • Debt is Not a Safety Net: Reforms to promote economic security

    • Promote increased savings, not increased debt, to help families meet unexpected financial emergencies.

    • Improve wages for working families.

    • Improve access to affordable health insurance for all Americans.

    • Strengthen unemployment insurance coverage and benefit levels.

  • Restoring Responsible Credit Practices: Reforms for fair credit and lending
    • Reform "penalty pricing" that saddles financially-vulnerable consumers with thousands of dollars in extra fees and interest costs.
    • Require changes in credit card rates and fees to be related to the original contract and limited to future activity on the consumer’s account.
    • Clearly disclose to consumers the long-term costs of making only minimum payments.
    • Ban binding mandatory arbitration clauses that prevent consumers from pursuing complaints in a court of law.
    • Require meaningful underwriting standards to ensure credit limits do not exceed a consumer’s ability to repay their credit card debt.

To view the full report, The Plastic Safety Net: The Reality Behind Credit Card Debt in America, please visit: www.demos.org or www.responsiblelending.org.

Members of the press: If you wish to setup an interview with sources, including case studies, or you have questions, please contact: Timothy Rusch, Demos, (212) 389-1407 / trusch@demos.org; Mike Flagg, Center for Responsible Lending, (202) 349-1862 / mike.flagg@responsiblelending.org, or Sharon Reuss, Center for Responsible Lending, (919) 313-8527 / sharon.reuss@responsiblelending.org.

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.