Many people have accumulated substantial debt and managing that debt is a significant challenge for financially vulnerable Americans.
Debt can be a positive tool to manage income volatility and to make long-term investments, such as paying for a car, college or a family home. However, many people have accumulated substantial debt and struggle to manage that debt successfully. The practical and psychological costs of living with debt can be overwhelming.
As of the end of 2015, low-income households owed an average of $7,662 in credit card debt, or 38% of their annual income. According to the Urban Institute, roughly 77 million Americans, or 35 percent of adults with a credit file, have a report of debt in collections. In a 2015 FINRA study, two out of five respondents report feeling that they have too much debt and 48% of respondents did not always pay off their full credit card balance on time.
This accumulated debt also impacts credit ratings, which in turn decreases access to affordable debt. Fifty-six percent of lower-income respondents who desired credit were either denied or offered less credit on one of their credit applications (21%), expected to be denied credit so did not apply (19%), or both (15%). Income and expense volatility and lack of savings are other major factors that make managing debt unattainable for many financially vulnerable people.
Addressing the financial challenge of managing debt is a critical step on the path to financial security.