Credit Crunch, Part II: Low-income NYC's Plastic Problem

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U.S. consumers are expected to incur $43.5 billion in credit card debt during 2012, according to new reports. With people therefore obviously repeating mistakes that helped lead to the Great Recession, it’s imperative that we gain a better understanding of what’s causing out-of-control spending. Doing so could not only help us avoid the type of double-dip recession that would push more low-income families below the poverty line and keep others from rising above it, but will also shed light on socioeconomic disparities that merit increased attention, especially as New York City is concerned.

Playing their cards wrong

Much of the debt problem can be attributed to a societal unwillingness to accept that pre-recession spending is a thing of the past, as income driven by the housing bubble was what made old habits temporarily affordable. Debt statistics at clearly show that consumers cut back significantly during the worst of the recession but then gradually began loosening their purse strings at the first signs of economic recovery, and with a $100 billion debt increase expected since the beginning of 2011, we’re on track to hit pre-recession debt levels.

While things aren’t quite so bad in New York City as you might expect given the high cost of living, they are worrisome nonetheless. The average New York City consumer has about $5,300 in credit card debt, according to Credit Karma, making it the 55th most indebted of the 108 major metropolitan areas for which data was collected (NYC is actually tied with Alachua City, Fl.). That’s certainly not chump change, but it’s better than the nearly $7,800 owed by the average consumer living in Honolulu.

However, this type of dangerous overleveraging is disproportionately problematic for people at the bottom of the credit spectrum as well as those with limited job security. According to the New York City Office of Financial Empowerment, lower income households have a higher credit utilization rate, lower credit limits available, and are more likely to have credit cards than bank accounts. In addition, at 20.15 percent, the average credit card interest rate for sub-prime credit card users is 55 percent higher than that for someone with excellent credit, which means debt is far more costly for the former demographic and the tipping point where interest becomes overly burdensome is much closer.

All of this combines to make it more difficult for low-income people to pass credit checks for renting an apartment, getting approval for auto or personal loans or even for obtaining certain employment. Further complicating matters is the fact that low-income folks at the bottom of the credit spectrum are likely to be the first to miss payments and incur credit damage in the event of another economic downturn. This would counteract any rebuilding efforts undertaken since the Great Recession and effectively keep them in a state of perpetual recession.

Giving credit where it’s due

Prior to recent economic events, little attention was paid to financial literacy if you weren’t planning on becoming a stock broker or an accountant. Now there is a massive need for it throughout the city, the country, and indeed, the world given that it has become increasingly apparent that our society knows little about money and debt management. According to data from the National Foundation for Credit Counseling and Visa, 42 percent of adults grade their personal finance acumen at a “C” level or below and 70 percent of parents say their kids don’t know the basics of money management, yet 44 percent of people still say that they learn about personal finance at home. It’s therefore no surprise that according to FINRA, 49 percent of New Yorkers lack a “rainy day fund” and 57 percent applied for a credit card without comparing different offers, illustrating that few lessons were learned from the Great Recession.

However, New York City non-profit organizations and government agencies alike have been taking up the mantle for improving financial responsibility at its root – education. The New York City Office of Financial Empowerment boasts a network of financial education providers; initiatives like w!se (which has grown to a national level) proactively provide financial literacy programs for young people; and The Community Service Society of New York boasts a full advocacy program that provides both financial literacy and counseling to lower income neighborhoods and households. Still other organizations like the New York Women’s Agenda have provided resources for women such as their Financial Literacy Guide, which is an exhaustive compilation of information that women and girls can use to improve their knowledge. Assemblyman Bob Reilly has even introduced a piece of legislation – Bill A02272 – that requires financial literacy to be taught to grades nine through twelve. With the heads of many low-income households working multiple jobs and spending less time at home than they would like, these programs and potential legal changes are especially important.

Ultimately, it will take a lot of work on both the personal and regulatory level to solve our nation’s debt problem and ensure that people of all socioeconomic backgrounds have the tools they need to be financially successful. However, New York City proves that the wheels of change are indeed in motion, which is good news for us all.

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