You may think that if you spend wisely you’ll be able to avoid huge amounts of credit card debt. But those who have this debt not only spend more frugally than those without it, they actually got into the debt in the first place because of hardships out of their control, not due to unwise budgeting, according to a report from the think tank Demos.
The report found that households with a family member who was unemployed for at least two months over the past three years are 14 percent more likely to be carrying credit card debt than those who escaped a brush with unemployment. A quarter of low- and middle-income families with credit card debt say that a layoff or job loss contributed to it, while 16 percent said it was the main cause. And it’s not just joblessness: nearly 40 percent of households with debt said that a family member had been trying to work full time at some point over the last three years but was only able to get part-time work, compared to just 22 percent of debt-free households who went through the same.
Health issues also play a huge role. Households where a member has had to go without insurance are 20 percent more likely to carry credit card debt than those that have insurance. (The survey was in 2012, when 50 million Americans lacked health insurance and before much of the Affordable Care Act went into effect.) But medical issues can still cause debt even when someone has insurance. More than 60 percent of households with credit card debt, both with and without insurance, said out-of-pocket medical expenses contributed to it. Families often turn to credit cards to cover these expenses, and for those who do, the average amount of medical debt on their cards is $1,555. Perhaps worse, twice as many households with credit card debt forgo care as debt-free ones.
There are other factors that can lead to debt: Among households that own a home, those with credit card debt are significantly more likely to be underwater on their mortgages, or to owe more than their homes are worth. Households with children under the age of 18 are 15 percent more likely to carry debt than those without kids. That may not be surprising, given that it costs a family more than $240,000 in housing, food, clothing, health care, education, and other expenses to raise a child to the age of 17.
And households without debt have three times the savings stashed away as those that have it, while just 9 percent of debt-free families have no savings, compared to nearly a third of households with debt. The lack of savings could be a significant reason that they turn to credit cards, as many more households without debt say they can turn to savings to cover unexpected costs. Past Demos research has found that 40 percent of families with credit card debt have had to turn to their cards to pay for basic expenses like rent, groceries, or utilities because they didn’t have enough money in checking or savings.
Meanwhile, the families carrying credit card debt actually turn out to spend less than those without it. Forty percent of debt-free households say they have purchased a major appliance over the last three years, while just 28 percent of indebted households. Those may be necessary purchases, but debt-free households are also to make large, non-essential buys like vacations or flat-screen TVs: 55 percent of those families made such a purchase over the past three years, compared to 42 percent of those with credit card debt.
The report notes, “These findings suggest that an individual’s level of credit card debt is more than a question of reckless spending versus personal responsibility: broad economic trends and specific policy choices created the larger economic crisis gripping American households, leaving families susceptible to high levels of credit card debt.”
The report helps dispel the myth that people who struggle financially get into those problems because of bad choices, rather than bad luck. Other data has come to the same conclusion. Consumption data shows that the poor spend more of their budgets on necessities and have less for things like eating out and entertainment than the wealthy. The poor have also reduced their spending to deal with the crisis, whereas the rich are spending more.