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ideas grow here

PUBLICATION #170 (09/08)

ISBN 978-1-932795-49-3

Consumer Debt Stress and Credit Cards

Mark MeyerExecutive Director and CEO

Filene Research Institute

Research Brief

Appendix

Copyright © 2008 by Filene Research Institute. All rights reserved.ISBN 978-1-932795-49-3Printed in U.S.A.

Deeply embedded in the credit union tradition is an ongoing search

for better ways to understand and serve credit union members. Open

inquiry, the free fl ow of ideas, and debate are essential parts of the

true democratic process.

Th e Filene Research Institute is a 501(c)(3) not- for-profi t research

organization dedicated to scientifi c and thoughtful analysis about

issues aff ecting the future of consumer fi nance. Th rough independent

research and innovation programs, the Institute examines issues vital

to the future of credit unions.

Ideas grow through thoughtful and scientifi c analysis of top- priority

consumer, public policy, and credit union competitive issues.

Researchers are given considerable latitude in their exploration and

studies of these high- priority issues.

Traditionally, the Filene Research Institute focuses on long- term

research questions that can take months or years to research and pub-

lish. Occasionally Filene also publishes Research or Innovation briefs.

Th ese briefs allow Filene to present important, time- sensitive, notori-

ous, and unbiased topics to the credit union system. Oftentimes

these briefs present an opportunity to distribute original research or

innovation fi ndings from Filene researchers or Fellows. We hope the

“brief ” format meets your need to obtain actionable and objective

information in a timely manner.

About Us

About the Author

I would like to thank Randall Olsen, PhD, professor of economics

and director of the Center for Human Resource Research at Ohio

State University, and the Consumer Finance Monthly Research

Group: Lucia Dunn, PhD, professor of economics; Jinkook Lee,

PhD, professor of consumer sciences and a Filene Fellow; and Mar-

garet Plahuta, marketing director. I would also like to thank Luis

Dopico, PhD, of Macrometrix for his academic review, and Vicki

Joyal, president of CVJ Strategic Intelligence, for her considerable

editorial contributions.

Acknowledgments

Mark Meyer is the executive director and CEO of the Filene

Research Institute. Upon joining in January 2003, he founded Filene

i3, a group made up of next- generation credit union leaders focused

on identifying and implementing new products, services, and busi-

ness models that will transform the credit union industry.

He has served as an attorney at a midsized law fi rm, as vice president

and legal counsel at Arizona State Credit Union, and as assistant vice

president–Credit Union Enterprise at the CUNA Mutual Group.

He served a three- year term as president of the Phi Class for Western

CUNA Management School and received the school’s Charlie M.

Clark Award for Inspirational Leadership. Mark also serves as sec-

retary on the board of directors for Great Wisconsin Credit Union.

Mark received his JD law degree from the University of Nebraska

and his bachelor of science degree in business administration from

Northern Arizona University. He is licensed to practice law in Ari-

zona and Colorado.

1

Preface

Consumer Debt Stress and Credit Cards is the second report in the

Filene Research Institute’s series of Consumer Finance Research

Briefs based on information derived from Ohio State University’s

Consumer Finance Monthly (CFM) survey.

Th e CFM is generated through a continuous monitoring survey

of consumer households and their fi nancial conditions. Since its

offi cial launch in February 2005, the Center for Human Resource

Research (CHRR) at Ohio State University has been collecting

CFM data through a monthly 25-minute telephone survey utilizing

random- digit dialing and weighting procedures to ensure a statisti-

cally valid, nationally representative sample of U.S. adult consumer

households. Data collected since CFM’s inception have grown by an

average of 333 completed interviews each month, bringing the total

to 10,986 observations as of year- end 2007.

Each research brief includes a high- level marketplace analysis in addi-

tion to facts (i.e., survey data derived from the CFM), fi gures that are

easy to read and comprehend, and food for thought (i.e., the Filene

Research Institute’s response to “So what?”).

Th is research brief explores debt- related stress with a focus on credit

card debt. Th e analysis seeks to address the following research

questions:

Did levels of consumer debt stress increase in 2007 from 2006 as •

the subprime mortgage crisis publicly unfolded?

How do levels of consumer debt stress vary by credit card debt •

indicators such as total credit card debts, missed payments,

accounts sent to collections, and previous bankruptcies?

How do levels of consumer debt stress vary by demographic •

variables such as age, annual household income, gender, race/

ethnicity, and marital status?

3

Marketplace AnalysisCould credit cards cause a fi nancial disaster similar to the subprime

mortgage crisis? Some analysts believe it could easily happen given

consumers’ ever- increasing reliance on credit cards, current credit

card debt levels, increasing defaults, and the fact that investors

hold billions of dollars in securitized debt backed by credit card

receivables.

According to Tim Westrich and Christian E. Weller, consumers are

increasingly relying on credit cards to replace home equity lines of

credit that have dried up along with the mortgage loan market.1 In

many instances, borrowers are using credit cards to purchase essen-

tials such as groceries and gasoline. What’s more, a USA Today article

reported that “a credit bureau analysis of consumer payment data

reveals that consumers are acting out of desperation” by using credit

cards as a lifeline for everyday living expenses.2 Th is article further

suggests that consumers who cannot make their monthly mortgage

payments have given up on trying to pay the mortgage and instead

“are focused on using credit cards to squeak by.” If this trend con-

tinues, the article predicts that maxed- out consumers could walk

away from their credit card debts just like they are doing with their

mortgages.

Westrich and Weller describe the sequence of events that could cause

this fragile structure to collapse:3

Growth in mortgages slowed as the subprime crisis unfolded, but •

credit card debt began to rise.

Banks tightened access to mortgages. At the same time they con-•

tinued to aggressively off er credit cards to subprime borrowers.

High fees, heavy interest rate burdens, and complex terms may •

lead to increased credit card defaults.

Th e share of credit card debt written off by banks has already •

risen sharply.

Increased defaults could unravel a market worth $915 billion •

(B) in securitized debt backed by credit card receivables, just as

delinquencies in the housing market unraveled the $900B market

in subprime mortgage- backed securities.

Compounding the problem is the consumer impact from large

banks that are tightening lending standards in hopes of avoiding

a credit card crisis as described by Business Week. According to the

1 Tim Westrich and Christian E. Weller, House of Cards: Consumers Turn to Credit Cards amid the Mortgage Crisis, Delaying Inevitable Defaults, Center for American Progress, February 2008.

2 Kathy Chu, “More Americans Using Credit Cards to Stay Afl oat,” USA Today, February 28, 2008, 1.

3 Westrich and Weller, House of Cards.

4

article, “the top 10 card issuers, which account for 95% of the

market for credit- card securities, are all big, highly rated banks.

By moving quickly to cut off risky card users early, the big banks

are hoping to keep the crunch from developing into a crisis.”4 Th e

Federal Reserve Board’s monitoring survey of senior loan offi cers

reported that 32% of domestic banks had tightened their lending

standards on credit card loans during the fi rst quarter of 2008.5

As access to credit decreases, consumers may panic and defaults

will rise.

Results from the Federal Reserve survey also indicate that domes-

tic banks have reduced the extent to which credit card loans are

granted to those who do not meet credit score minimums, reduced

credit limits on credit cards, and increased minimum credit score

requirements. Recent reports of unexpected and steep rate hikes

suggest that banks are tightening standards for existing cardhold-

ers in addition to potential new customers. One Bank of America

customer said she received notifi cation in January that the rate on

her credit card was increasing from 10% to 28% (a 180% increase)

even though she had never been late on a payment.6 Other occur-

rences of rate increases ranging from 47% to 92% are detailed in

additional press reports.7

Westrich and Weller see similarities between the root cause of the

subprime mortgage debacle and potential credit card defaults. Th ey

suggest that if consumers do not fully understand the terms and

conditions of their credit cards, defaults will follow. Th e solution that

they advocate is better information and greater transparency about

credit card terms and conditions, along with elimination of the most

abusive and diffi cult- to-understand practices.8

At least two pieces of legislation designed to create greater trans-

parency of terms and conditions and to curb abusive credit card

practices such as double- cycle billing, universal default, and charg-

ing interest on fees are now winding their way through Congress.

One bill is the Credit Cardholders’ Bill of Rights Act (H.R. 5244),

introduced by Rep. Carolyn Maloney (D-NY), chair of the House

Financial Services subcommittee on fi nancial institutions.

In addition, on May 2, 2008, the National Credit Union Adminis-

tration (NCUA), the Federal Reserve Board, and the Offi ce of Th rift

4 Matthew Goldstein and David Henry, “Tapped-Out Consumers,” Business Week, January 28, 2008, 22.

5 Board of Governors of the Federal Reserve System, The April 2008 Senior Loan Offi cer Opinion Survey on Bank Lending Practices.

6 Kimberly Palmer, “One Debt Begets Another,” U.S. News & World Report, March 10, 2008, 44.

7 McClatchy- Tribune News Service, “Credit Card Rate Hikes Shock Holders,” Pittsburgh Tribune- Review, February 19, 2008; Mara Der Hov-anesian, Christopher Palmeri, Nanette Byrnes, and Jessica Silver- Greenberg, “Over the Limit,” Business Week, February 18, 2008, 34.

8 Westrich and Weller, House of Cards.

Supervision issued a joint proposed rule to prohibit the following

seven practices associated with credit card programs:9

Unfair time constraints for consumers to make payments.•

Unfair allocation of payments among balances with diff erent •

interest rates.

Unfair application of increased annual percentage rates to out-•

standing balances.

Unfair fees for exceeding the credit limit solely because of a hold •

placed on an account.

Unfair balance computation method.•

Unfair fi nancing of security deposits and fees for issuance or avail-•

ability of credit.

Deceptive fi rm off ers of credit.•

Industry analysts suggest that new regulations would likely eat into

credit card company profi ts, the cost of which would most likely

get passed down to borrowers. TowerGroup senior analyst Dennis

Moroney predicts that “we are going to see a further tightening of

credit [where] the riskiest consumers will be hit the hardest.”10 In

addition, the American Bankers Association issued the following

statement on the proposed rule:11

Th e Federal Reserve’s proposal is an unprecedented regulatory intru-

sion into marketplace pricing and product off erings. We are deeply

concerned that these rules will result in less competition, higher

consumer prices, fewer consumer choices and reduced consumer access

to credit cards. In short, everyday consumers will bear the real cost of

these proposals.

The Credit Union Market“Credit unions are largely the collateral damage of a subprime mort-

gage debacle,” according to a report by CUNA economists. “Th is

has had two eff ects on credit unions. First, some members with toxic

mortgage loans from other lenders are fi nding it diffi cult to pay their

credit union loans. Second, the broader economic slowdown that is

spreading from the subprime mortgage mess is causing other mem-

bers to have economic diffi culty, and therefore to fall behind on their

loans.”12

5

9 National Credit Union Administration, “NCUA to Issue Proposed Unfair or Deceptive Credit Practice Rule,” media release, May 1, 2008.

10 Jessica Silver- Greenberg and Mara Der Hovanesian, “The Brewing Credit Card Storm,” Business Week, May 26, 2008, 34.

11 American Bankers Association, “ABA Statement on Federal Reserve’s Proposed Credit Card Regulations,” media release, May 2, 2008.

12 Bill Hampel, Mike Schenk, and Steve Rick, The U.S. Mortgage Crisis: Causes, Effects and Outlook Including Suggested Credit Union Responses, Credit Union National Association—Policy Analysis Division, January 31, 2008.

Th e report goes on to list fi ve outcomes that credit unions will

struggle with as a result of falling home prices and the subprime

mortgage crisis:

A decline in mortgage loan collateral value.•

Rising delinquencies and charge- off s.•

Less home- equity lending.•

Spillover eff ects into credit card portfolios.•

A slowing of overall credit demand.•

In fact, credit union delinquency rates are already on the rise,

increasing from .64% in March 2007 to 1.06% in June 2008.13

Credit union credit card delinquencies and charge- off s are also on

the rise. As the statistics in Figure 1 illustrate, credit union credit

card delinquencies/loans reached 134 basis points in 2007, up from

6

0.0

0.5

1.0

1.5

2.0

2.5

200720062005200420032002200120001999

Perc

ent o

f loa

ns o

utst

andi

ng

Delinquencies Charge-offs

Figure 1: Credit Union Credit Card Delinquencies and Net Charge- off s by Year

Source: CUNA Economics & Statistics’ Asset Quality Trends for U.S. Credit Unions (http://advice.cuna.org/econ/cu_stats.html).

13 CUNA Economics & Statistics, Monthly Credit Union Estimates—June 2008, Credit Union National Association, August 1, 2008.

7

105 basis points in 2006. Similarly, credit union credit card net

charge- off s/average loans reached 162 basis points in 2007, up from

149 basis points in 2006.

Credit union members are unfortunately not immune from eco-

nomic changes that aff ect consumers in general. Members, too, are

increasing their reliance on credit cards. Consider that credit union

credit card balances increased 13.5% in 2007, up from 11% in

2006.14

Economic uncertainty, high food and energy prices, and less access

to credit have caused a dangerous and stressful situation for some

consumer households. Many individuals and families that are charg-

ing everyday living expenses will eventually run out of credit. Even if

they don’t max out their credit cards, minimum monthly payments

and the likelihood of default and bankruptcy will increase. Your

members are likely to encounter some form of debt stress at some

point in their fi nancial lives. If you can fi nd them before it is too late,

you might be able to prevent further damage to both their fi nancial

and personal health. Th e following section explores the debt stress

experienced by today’s consumer.

CFM Survey Analysis

Debt Stress IndicatorsTh e psychological stress caused by debt is a signifi cant area of inquiry

within the CFM. Th e survey instrument includes a series of six ques-

tions asking consumer household representatives about the extent to

which they are aff ected by debt- related stress.15 Each question con-

tains fi ve response categories from which respondents may choose,

designed to depict levels of stress resulting from the respective topics

in question. Th e CFM’s battery of psychological debt stress items is

as follows:

1. Overall, how often do you worry about the total amount you owe in

overall debt? Would you say you worry all of the time, most of

the time, some of the time, hardly ever, or not at all?

2. How much stress does the total debt you are carrying cause to you? Is

it a great deal of stress, quite a bit, some stress, not very much, or

no stress at all?

3. Now, thinking ahead over the next fi ve years, how much of a prob-

lem, if any, will the total debt you have taken on be for you? Will

14 CUNA Economics & Statistics, U.S. Credit Union Profi le, Year- End 2007, Credit Union National Association, February 22, 2008.

15 Although the CFM samples households (rather than individuals), some questions—such as the psychological debt stress battery of items—ask for individual perspectives. It is therefore appropriate to report the survey responses of these individuals in conjunction with their demographic characteristics. Keep in mind, however, that these data do not represent the perspectives of all U.S. consumers.

8

it be an extreme problem, a large problem, medium problem,

small problem, or no problem at all?

4. How concerned are you that you will never be able to pay off these

debts? Are you very much concerned, quite concerned, somewhat

concerned, not very concerned, or not at all concerned?

5. How serious are the problems your debt has caused in your family?

Are they extremely serious, very serious, somewhat serious, not

very serious, or not serious at all?

6. How seriously has your debt aff ected your job performance? Has it

been aff ected extremely seriously, very seriously, somewhat seri-

ously, not very seriously, or not seriously at all?

CFM data collected during 2007 reveal that representatives of nearly

eight million American households worry “all of the time” about

the amount of overall debt they are carrying. While the percent-

age of responses that fall into the highest level of stress for the

six debt- related questions is very low—ranging from just 2% to

7%—the potential impact to individuals and families could still be

severe. Survey respondents indicate that they are most stressed by

their total amount of overall debt—7% worry “all of the time.” A

similar percentage is “very much concerned” that they may never be

able to pay off these debts, and 6% report that their total debt causes

them “a great deal of stress.”

Fortunately, fewer people (4%) are likely to suff er “extremely seri-

ous” family problems as a result of their debt, and not many (3%)

are overly concerned about their total debt fi ve years into the future.

Finally, survey respondents are least likely to indicate that their debt

has “extremely seriously” aff ected their job performance. Even so,

consumers representing more than two million American households

(2%) say that their debt has had an extremely serious eff ect on their

job performance.

Debt-related stress measurements gathered throughout 2007 did

not increase substantially over those gathered during 2006. Th is is

somewhat surprising given that the subprime mortgage crisis pub-

licly unfolded during the third and fourth quarters of 2007. Figure 2

illustrates the extent to which debt- related stress levels changed from

2006 to 2007, using a top- box analysis where the two highest stress

levels for each of the questions were combined into a single category.

Th e only 2007 debt stress measure that signifi cantly increased over

2006 is the seriousness of debt- related problems for family life. In

2007, 10% of respondents indicated that debt caused “very serious”

or “extremely serious” problems in their families—an increase of

three percentage points over 2006.

9

Credit Card IndicatorsNearly a third of households (32%) surveyed during 2007 owed

money on their credit cards after their most recent payment(s). For

these households, the average balance remaining on all credit cards

increased 19% to $7,451 in 2007, up from $6,267 in 2006.

CFM data reveal that Americans who live in households with

larger volumes of credit card debt are more likely to suff er from

debt- related stress. For example, the level of stress caused by the total

amount of a household’s debt increases as the amount of credit card

debt increases. Similarly, the extent to which total debt will be a

future problem increases as credit card debt increases.

To allow for additional types of analyses, values were assigned to

the response categories associated with each psychological debt

stress indicator (where 1 is the lowest level of worry/stress, and 5

is the highest level of worry/stress) to create an ordinal- level scale

of overall debt stress by summing the values across each of the

six indicators. A correlation analysis was then used to determine

whether interval- level variables such as the total amount of credit

card debt are correlated with overall debt stress. Using this analysis,

we fi nd that a positive correlation exists between overall debt stress

and total credit card debt. Similarly, a 1997 study—conducted as

0 10 20 30

Debt causedjob problems

Debt causedfamily problems

Concern aboutpaying off debt

Total debt will befuture problem

Stress causedby total debt

Worry about totaloverall debt

Percent of consumer households in top two (highest) stress categories

2006 2007

14.7

16.2

16.9

16.6

8.5

8.7

10.8

11.6

7.1

10.1

4.0

4.5

Figure 2: Debt Stress Indicators, 2006 vs. 2007

Source: Filene Research Institute and the Ohio State University’s 2006 and 2007 Consumer Finance Monthly (CFM).

10

bankruptcy fi lings were reaching historic high levels—found that

anxiety increased with the ratio of credit card debt to income and

with being in default.16

Figure 3 demonstrates that at the very highest levels of overall debt

stress, total credit card debt reached an average of $13,365 in 2007.

Th is compares to an average of just $5,515 for consumer households

with the very lowest levels of overall debt stress.

In 2007, nearly 16% of consumer households with at least one credit

card had one or more accounts sent to a collection agency during

the previous six months. Th is fi gure is up three percentage points

over the 2006 fi gure. Not surprisingly, credit stress levels for each

of the six indicators are uniformly higher for those households with

accounts in collections than for those that are not on collection

agency call lists.

$0

$5,000

$10,000

$15,000

Very high(23 or more)

High(16–22)

Moderate(11–15)

Low(7–10)

Very low(6)

Level of overall debt stress

Aver

age

tota

l cre

dit c

ard

debt

Overall average = $7,451

$5,515$5,594

$6,563

$10,528

$13,365

Figure 3: Overall Debt Stress by Total Credit Card Debt in 2007

Note: “Overall debt stress” is the sum of ordinal responses to the six debt stress indicators.

Source: Filene Research Institute and the Ohio State University’s 2007 Consumer Finance Monthly (CFM).

16 Patricia Drentea, “Age, Debt and Anxiety,” Journal of Health and Social Behavior 41, no. 4 (2000): 437–50.

11

One in ten consumers surveyed during 2007 fi led for bankruptcy

at some point in their lives. Th e existence of a prior bankruptcy

increases the likelihood that a survey respondent will report high

levels of debt- related stress. Th is suggests that bankruptcy is merely a

temporary solution to an ongoing problem.

About 12% of consumer households surveyed in 2007 had missed

a credit card payment by 60 days or more within the previous six

months. While the incidence of missed credit card payments is on

the rise (the 2007 fi gure increased by two percentage points over

2006), it is surprisingly not associated with higher levels of credit

stress. Th e fact that one or more missed credit card payments is

not associated with higher levels of debt stress is cause for concern.

It appears that some borrowers may not realize the consequences

of missing a payment. Or perhaps borrowers have minimized the

importance of paying credit card bills to the point where it does not

cause them to worry about debt.

From this analysis, we conclude that the extent of debt- related stress

is defi nitely aff ected by credit card debt indicators. Credit stress levels

are likely to be higher among the following groups of consumer

households:

Th ose with high volumes of total credit card debt (i.e., $10,000 •

or more).

Th ose with one or more accounts in collections.•

Th ose who have fi led bankruptcy at some point in their lives.•

Demographic CharacteristicsConsumer debt stress also varies by demographic characteristics.

Th e results of an analysis to determine the relationship between debt

stress and annual household income and between debt stress and

respondent age are illustrated in Figure 4. By again utilizing the vari-

able created by summing responses across the six debt stress items,

we fi nd that both age and annual household income are negatively

correlated with overall debt stress.

For the most part, those with higher overall debt stress levels have lower

household incomes than do those with lower debt stress levels. Th ose

with the lowest household incomes are likely to endure the highest

levels of debt- related stress, probably because many don’t earn enough

money to cover both existing debt and household essentials such as

groceries and gasoline. In fact, the average annual household income for

respondents with the highest debt stress levels is $44,930, compared to

an average of $110,437 for those with the lowest debt stress levels.

Similarly, but to a lesser extent, those with lower overall debt stress

levels tend to be older than those with higher debt stress levels. Th is

12

is in line with another recent study that discovered those aged 60 and

older are signifi cantly less worried about credit card debt than are

younger age groups.17

However, consumers with the highest debt stress levels are not par-

ticularly young. In fact, they might best be described as middle- aged.

Data from the CFM reveal that the average and median ages of

people with the highest debt stress levels are 50 and 49, respec-

tively. Over the years, credit union member research studies have

reported that those 45 and older save more and borrow less often

than do members between the ages of 25 and 44 (i.e., those in the

peak borrowing years). Perhaps the range of peak borrowing years is

widening, perhaps debt levels have become so high that the bur-

den is shouldered for many years, or perhaps it’s a recognition that

annual incomes are not growing as fast as they once did. No matter

the reason, we now know that high levels of debt- related stress are

17 Shayna Lee Thums, Barbara M. Newman, and Jing Jian Xiao, “Credit Card Debt Reduction and Developmental Stages of the Lifespan,” Journal of Personal Finance 6, no. 2/3 (2008): 86–108.

20

25

30

35

40

45

50

55

60

65

Very high(23 or more)

High(16–22)

Moderate(11–15)

Low(7–10)

Very low(6)

Level of overall debt stress

Aver

age

annu

al h

ouse

hold

inco

me

Aver

age

age

Average annual household income Average age

$160,000

$140,000

$120,000

$100,000

$80,000

$60,000

$40,000

$20,000

Figure 4: Overall Debt Stress by Household Income and Age

Note: “Overall debt stress” is the sum of ordinal responses to the six credit stress indicators.

Source: Filene Research Institute and the Ohio State University’s 2007 Consumer Finance Monthly (CFM).

13

not found exclusively among young people. Furthermore, a recent

AARP research report notes that “age is increasingly associated with

fi nancial distress and seeking protection from creditors through the

bankruptcy courts,” as “Americans aged 55 or older have experienced

the sharpest increase in bankruptcy fi lings.”18

As it turns out, the relationship between age and debt stress does

not vary considerably across the six indicators. Th e age group with

the highest stress incidence for each of the six debt stress indicators

is shown in Figure 5. Th is analysis reveals that each of the indicators

has one age group in common: 35- to 44-year-olds.

Gender is also associated with debt stress levels. Female respondents

are consistently more likely than males to report high levels of stress

for each of the six debt stress indicators. Th e fi nding that women

are more likely than men to experience debt- related stress was also

recently acknowledged in an Associated Press (AP)-AOL Health

survey of U.S. adults.19

Respondents who are widowed or have never been married generally

report higher levels of debt- related stress than do those who are mar-

ried or divorced. In particular, people who have never been married

are more likely than their counterparts to worry frequently and be

highly stressed about total debt, to anticipate signifi cant debt- related

problems in the future, and to be highly concerned about their abil-

ity to pay off their debt. On the other hand, those who are widowed

or divorced are more likely to indicate that debt has caused very or

extremely serious problems for their families. Perhaps widowers are

struggling to pay off their spouse’s medical expenses. Debt could

also be a factor in the decision to divorce. Keep in mind that marital

status is likely related to both age and annual household income.

Figure 5: Debt Stress Indicators by Age Group with Highest Incidence of Stress

Debt stress indicatorAge group with highest

stress incidence

Worried about total debt “most or all of the time” 35–44

“Quite a bit or a great deal” of stress caused by total debt 35–44

Total debt a “large or extreme problem” in the future 35–44 and 44–54 (tie)

“Quite or very much concerned” about ability to pay off debt 35–44

Debt caused “very or extremely serious” problems in family 35–44

Debt “very or extremely seriously” affected job performance 35–44 and 20–34 (tie)

Source: Filene Research Institute and the Ohio State University’s 2007 Consumer Finance Monthly (CFM)

18 Deborah Thorne, Elizabeth Warren, and Teresa A. Sullivan, Generations of Struggle, AARP, June 2008.

19 Associated Press, “Poll: Stress of Debt Takes Physical Toll.” CNN.com, June 9, 2008.

14

Finally, black and Hispanic respondents report higher levels of

debt- related stress than do white respondents. Like marital status,

racial and ethnic diff erences may in part be by- products of age and

annual household income. Consider that both the black and His-

panic populations are younger and have lower annual household

incomes than those of whites.

Results of the demographic analysis reveal that the extent of

debt- related stress is aff ected by age, household income, and gen-

der. Credit stress levels are likely to be highest among the following

groups of consumers:

Th ose with lower annual household incomes (i.e., less than •

$60,000).

Th ose aged 35–44.•

Women.•

Neither the analysis of credit card debt indicators nor the analysis

of demographic characteristics provides predictive results. How-

ever, demographic indicators can help identify members who are in

fi nancial trouble. And credit card indicators can be added to the list

of factors that credit unions consider or discuss when working with

members who are overwhelmed by debt.

In summary, an analysis of CFM data reveals that debt stress is related

to total credit card debt, and for some consumers, fear and anxiety

are extremely high. Credit union executives should be concerned

about those members who are so overwhelmed by debt stress that it

aff ects their health,20 their jobs, and their family lives. An additional

cause for concern is the possibility that these members will throw in

the towel and make poor, long- lasting fi nancial decisions that will

negatively aff ect their fi nancial futures and could also aff ect the level

of service that the credit union is able to provide to other members.

Strategic Implications for Credit UnionsTh e analysis of consumer debt- related stress and credit card debt pre-

sented in this research brief supports the following recommendations

for credit union executives to consider as they work to help members

through this period of economic turmoil and uncertainty:

Continue to take into account the credit card and demographic •

indicators identifi ed in this report in your ongoing analyses of

members’ total credit card debt. Reach out with off ers of fi nancial

counseling to members most likely to be overly stressed.

20 The AP- AOL Health survey found that people with high debt stress are more likely than their counterparts to have ulcers or digestive tract problems, muscle tension, migraines/headaches, severe anxiety, severe depression, and heart attacks.

15

Practice proactive member counseling by learning to recognize •

and help reduce debt- related stress. Intervene sooner (e.g., as soon

as a payment is fi ve days late) rather than later.

Help your members avoid pushing the panic button. Target •

members (those with annual household incomes of less than

$60,000, aged 35–44, and women) with information and off ers of

assistance in dealing with unexpected credit card term and condi-

tion changes. Educate members about predatory credit card terms

and conditions and the potential adverse impact. Off er credit (as

appropriate) to those who have been turned down elsewhere.

Promote your credit union’s “consumer friendly” credit card terms •

and conditions and help members learn to select credit cards with

the most favorable features.

Where appropriate, transfer credit card debt from members’ other •

cards to credit union credit cards or debt- consolidation loans, and

assist members with closing other accounts.

Take advantage of the opportunities presented by banks that are •

tightening credit standards. Cross sell your credit card and other

products/services to members who are frustrated and fed up with

their banks.

In addition, CUNA economists suggest that credit unions respond to

the fallout from the U.S. mortgage crisis in the following ways:21

As long as your credit union has more than adequate capital, do •

not penalize members by establishing higher loan rates, more and

higher fees, lower dividend rates, or service cutbacks or layoff s in

order to keep net income from falling for a year or two.

Focus on close monitoring and active collections, rather than •

tightening credit standards in response to rising delinquency and

loan losses.

Credit unions with strong capital positions and stable balance •

sheets should consider the opportunities created by the current

economic situation:

National banks are likely alienating customers by increasing

credit card rates.

Consumers who need loans may be faced with higher rates

and fees at their banks and may have diffi culty getting loans

approved.

Demonstrate that you are planning and controlling any tempo-•

rary decline in net income by modeling the credit union’s earn-

ings and net worth for the next few years.

21 Bill Hampel, Mike Schenk, and Steve Rick, The U.S. Mortgage Crisis: Causes, Effects and Outlook Including Suggested Credit Union Responses, Credit Union National Association—Policy Analysis Division, January 31, 2008.

17

Drentea, Patricia. 2000. “Age, Debt and Anxiety.” Journal of Health

and Social Behavior 41 (4): 437–50.

Lopes, Paula. 2008. “Credit Card Debt and Default over the Life

Cycle.” Journal of Money, Credit, and Banking 40 (4): 769.

Scott, Robert H. III. 2007. “Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005: How the Credit Card Industry’s

Perseverance Paid Off .” Journal of Economic Issues 41 (4): 934–52.

Silver-Greenberg, Jessica, and Robert Berner. 2008. “Too Much Debt?

Too Bad.” Business Week, March 17, 38.

Th ums, Shayna Lee, Barbara M. Newman, and Jing Jian Xiao. 2008.

“Credit Card Debt Reduction and Developmental Stages of the

Lifespan.” Journal of Personal Finance 6 (2/3): 86–108.

United States Government Accountability Offi ce (GAO). 2006. Credit

Cards: Increased Complexity in Rates and Fees Heightens Need for More

Eff ective Disclosures to Consumers, GAO-06-929, September 12.

For Further Reading

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PUBLICATION #170 (09/08)

ISBN 978-1-932795-49-3

Consumer Debt Stress and Credit Cards

Mark MeyerExecutive Director and CEO

Filene Research Institute

Research Brief