Jos

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Drowning in Debt
Why are We in So Deep and How Do We Get Out?

• José A. García
• Senior Research and Policy Associate, Economic
  Opportunity Program

www.demos.org
2
Factors Driving Debt

• Technological Advances in Underwriting
• Deregulation
• Growing Economic Vulnerability
• Fractures in Social Contract

3
Deregulation
Credit cards The Supreme Court decides that
credit card fees, like interest, can be limited
only by the issuers home state (which by now
generally means South Dakota or Delaware).
Credit cards Supreme Court rules that banks can
charge the highest interest rate allowed by the
state where they are located, not the state where
their customer lives. South Dakota and Delaware
respond by removing their usury laws.
Bankruptcy reform Responding to credit card
companies complaints of bankruptcy abuse and
surprise bankruptcies, Congress imposes new
requirements on filers, including a means test.
Exempts private student loans.
1978
1980
1982
1987
1996
1999
2005
1994
1997
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Median Family Income 1979-2004 (2004 dollars)

Source The State of Working America 2006/2007
5
Average Annual Expenditures, 1989-2004 (2004
dollars)
Source US Bureau of Labor Statistics
6
Household Revolving Consumer Debt (in billions)
Source Federal Reserve Board
7
Home Equity Cashed Out Through Refinancing
2001-2006 (2006 dollars)
Source Joint Center for Housing Studies of
Harvard University, The State of the Nations
Housing, 2007
8
Personal Savings as a Percentage of Disposable
Personal Income, 1989-2006
Source US Department of Commerce, Bureau of
Economic Analysis
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Credit Card Debt Trends Findings from National
Household Survey
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Methodology

• 1,150 Households Surveyed by Phone
• Household income between 50 and 120 of
• Local Median Income
• Have credit card debt for longer than three
  months
• One-third of all low- and middle-income
  households qualifiedrepresenting 41 million
  people in 15 million households
• Margin of error is plus/minus 3 percentage points

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Mean/Median Amount of Debt

• Mean
• 8,386
• Median
• 5,000

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Length of Time in Debt

• Mean
• 3 ½ Years (43 months)
• Median
• 2 ½ Years (30 months)

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Reasons for Debt

• 48 car repairs
• 38 home repairs
• 34 major household appliance
• 29 an illness or medical expense
• 25 a layoff or job loss
• 21 college tuition and expenses

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Borrowing for the Basics

• Over 1/3 of households reported using credit
  cards in the past year to pay for basic living
  expenses
• Average number of months 4
• Median number of months 3

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Predictors of Higher Debt

• Why do some households have higher credit card
  debt than others?
• Regression results
• Households reporting a layoff or major medical
  expense more likely to have higher relative debt
• Higher relative debt due to use of credit cards
  to pay for basics

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Hidden Credit Card Debt

• 40 of homeowners had refinanced their home in
  the past 3 years
• Over half used the money to pay off credit card
  debt
• Amount paid off
• Mean 12,000 Median 10,000
• Amount households still had in credit card debt
  14,000 on average

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Costly Credit

• One-third of cardholders pay interest rates
  higher than 20
• Cardholders with incomes below 25,000 much more
  likely to be paying these rates
• African American and Latino cardholders twice as
  likely as whites to pay rates higher than 20

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Policy Recommendations

• Reform the Supply Side
• Prohibit Retroactive Rate Hikes - Feds
• Double cycle billing - Feds
• Eliminate Universal Default
• Late Payment Grace Period
• Limit Penalty Rate Increases
• At any time for any reason

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Policy Recommendations

• Address Demand for High Cost Credit
• Enhanced Savings Incentives
• Better Protections Against Income Volatility
• Health Insurance Costs
• Create New High Wage Jobs