The availabiity of, and seemingly limitless access to, credit is getting the royal treatment these days, as the quotes above suggest. Borrowing, it seems, is not only a solution, but apparently the preferred one for families with limited incomes, those facing an unexpected and unaffordable expense, or both.
Consider our nation's health care crisis, which has been well articulated here at DKos, especially by nyceve. According to a new report by Demos and The Access Project, Borrowing to Stay Healthy: How Credit Card Debt is Related to Medical Expenses (pdf), many Americans are using credit cards to fill the gaps left by being un- or underinsured and without cash on hand to pay:
Overall in our survey, 29 percent of low- and middle-income households with credit card debt reported that medical expenses contributed to their current level of credit card debt. Within that group, 69 percent had a major medical expense in the previous three years. Overall, 20 percent of indebted low- and middle-income households reported both having a major medical expenses in the previous three years and that medical expenses contributed to their current level of credit card debt.
Working in collaboration, the health care and credit card industries are compounding the problem of medical indebtedness. Again, according to the Demos/Access Project report:
[H]ealth care providers are more aggressively seeking upfront collection of co-pays and deductibles. A component of this strategy is to encourage patients to use third-party lenders such as credit cards to pay for medical expenses they cannot afford, which families frequently do to meet high medical bills.
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In recognition of the growing market for patient out-of-pocket costs, the credit card industry has developed "medical credit cards" designed specifically for medical expenses, which have recently entered the marketplace. In some cases, health insurers and financial institutions are teaming up to offer products featuring high deductible health insurance and lines of credit to meet the increase in out-of-pocket expenses associated with the high deductible. Several HSA (Health Savings Account) servicers are now incorporating integrated lines of credit into their HSA products.
It's not just health care. A prior Demos study, The Plastic Safety Net: The Reality of Debt in America, found that "seven out of 10 low- and middle-income households reported using their credit cards as a safety net -- relying on credit cards to pay for car repairs, basic living expenses, medical expenses or house repairs." In addition:
The survey also asked households whether they had used credit cards in the past year to pay for basic living expenses, such as rent, mortgage payments, groceries, utilities or insurance, because they did not have money in their checking or savings account. One out of three households reported using credit cards in this way -- reporting that they relied on credit cards to cover basic living expenses on average four out of the last 12 months.
Neither is it just credit cards. A new Federal Reserve Board report, which has not yet been released to the general public (and so we don't yet know if its authors, Samuel G. Hanson and Donald P. Morgan, will offer a disclaimer that it's not the Board's views being expressed), defends the payday lending industry and seems to be the only one to declare -- in the report's title, no less -- that payday lenders are "not predatory." Some excerpts of the report were posted on the rent-to-own industry's trade website, including this:
Households with uncertain income who live in states with unlimited payday loans are less likely to have missed a debt payment over the previous year...consistent with claims by defenders of payday lending that some households borrow from payday lenders to avoid missing other payments on debt. (Emphasis mine.)
It may well be a good thing that a short-term, small dollar loan can help a family get through a month or two of tight finances. But only if it happens once. Otherwise, what Morgan and Hanson posit as a defense of payday lending is really just a fancy way of saying, "forestalling the inevitable." Moreover, a significant chunk of the payday lending industry's income comes not from the occasional user, but from rollovers (pdf, see page 19).
Morgan and Hanson also state: "On the whole, our results seem consistent with the hypothesis that payday lending represents a legitimate increase in the supply of credit, not a contrived increase in credit demand." On the demand side, we'll have to await release of the study itself to determine what is meant by "contrived demand." But if you look at website for the industry's trade association, the Community Financial Services Association of America, you can see what it says drives demand, at least in part, for payday loans -- avoidance of fees from bounced checks and late payments.
But what of the conclusion that payday lending increases the supply of credit? Well, it gets back to the point of this whole diary. Both the credit card and payday lending industries (as well as other predatory lenders, such as those offering rapid tax refunds or car title loans) claim to be filling a need that would otherwise go unmet. That's true. The problem is that they offer a short term fix rather than a solution. Moreover, that fix certainly increases the cost of the underlying good or service, be it a trip to the doctor or a car repair, and likely serves to compound the borrower's long term problem.
Worse, the fix offered by credit providers is the prevailing public policy. As quoted at the outset, George Bush hailed the new bankruptcy law as a means of making even more credit available, "especially for low-income workers who already face financial obstacles." (They saw no irony in that statement; over the years, bankruptcy reform supporters created two general classes of people: Hard working Americans who pay their bills and the schemers and frauds who seek refuge in bankruptcy.) In other words, instead of tackling problems like stagnant wages, "financial obstacles," health care or any of the myriad other money problems Americans face, Bush, his then-allied Congress and the powerful financial services industry think the better course is to let people build their own safety nets, and to make them from borrowed ropes.
Of course, that the Democrats now run Congress gives rise to hope that this will change. They dropped the ball on the new bankruptcy law, siding far too often and by far too many with republicans, but the House passed bill on student loan interest is a step in the right direction. National health care would be another. Other ideas might include creating an incentive for people to save at least small, "rainy day" amounts, enacting a meaningful usury law, and putting an end to practices like the universal default, which surely increases the speed at which the borrowed safety net unravels for people who fall behind.
Whatever the steps along the way, they should all lead toward the ultimate goal of restoring and making secure a social safety net, one that ensures that the public interest is no longer subordinated to the profit interest of a privileged few.
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