A new survey from Bankrate found that 74 million people, nearly one-third of the adults living in this country, have more credit card debt than they have emergency savings. That is the highest it’s been in nine years, since right after the last recession. Notably, the amount of credit card debt and low savings is a problem across the social spectrum, affecting people of every income bracket, education level, age, and political affiliation.
Lower-middle class ($30,000-$49,999) and upper-middle class households ($50,000-$74,999) were more likely to report that their credit card debt exceeds their savings.
While the survey results are startling, they’re not our first wake-up call. A 2016 Federal Reserve survey found that two out of every five people couldn’t come up with $400 to cover an emergency. That 40 percent spanned income levels, meaning even higher earners would be in a financial bind if just one unexpected expense, such as a car repair or medical emergency, occurred.
That’s pretty dire news, especially if, as more and more financial experts predict, we’re edging closer to another recession. Recessions kill jobs, cut income, and squeeze credit. The millions of people who have more credit card debt than savings will be especially hard hit because their income may not be enough to cover their card bills and living expenses.
Credit cards allow people to live beyond their means. That’s tempting.
Credit cards become a lifeline because people have so little savings. When there is an emergency — everyone faces unforeseen expenses now and again — people cannot cover the cost from their bank balance, so they turn to credit. Then, with the high interest rates that credit cards carry, the balance can quickly balloon out of control.
Over the past 10 years, credit has become easier to get. Lenders have relaxed requirements, so even those with low credit scores have been able to secure new credit cards and loans. That’s made it easier to run up debt. Instead of recognizing the need to build an emergency fund, people have assumed they would be able to rely on credit cards or loans to make ends meet in the short term.
Many people see their homes as a type of emergency fund rather than simply as the place they live. Their thinking is that if something bad happens, such as a job loss, they can resort to a home equity loan or home equity line of credit to meet their needs.
That’s extremely risky, especially as the economy slows its growth or even contracts. In those circumstances, home values fall, and lenders impose stricter requirements on borrowers, eliminating home equity as a viable option.
The amount of debt people carry has a massive effect on the overall economy. If we enter another recession, perhaps even driven into it in part by our high debt load, the people hardest hit by the downturn will be those without a safety net. Millions of people could be left scrambling to pay their bills.
As creditors tighten requirements for cards and loans, people will no longer be able to finance a lifestyle on credit. They risk falling behind on their bills, which in turn increases their debt, cuts their spending, and hits the economy. The credit-vs.-savings crisis threatens virtually every corner of the economy.
Those on the wrong side of the debt/savings equation should start paying down credit card debt now. Even small payments add up and help reduce principal. More widespread use of cash instead of credit will also help insulate the economy from a credit bubble.
Kat Tretina is a freelance finance writer based in Orlando.
