The High Cost of Easy Credit

Editor’s note: This is part 3 of a 12-part collaborative series between Next Avenue and Marketplace Morning Report.

We borrow for many reasons. Vacation. Furniture. Education. Home. Convenience. The story of the past half century when it comes to debt is the "democratization of credit." Borrowing options once limited to the well-heeled have been gradually offered throughout society.

Yet, while often-noxious barriers to borrowing have fallen, the modern credit economy comes with a steep price tag. The merchants of debt are savvy at promoting the convenience of credit while hiding its true cost.

Debt payments can weigh heavily on older generations of modest means. They typically have little savings, retirement nest eggs and other resources to tap in their elder years.

Many earned low wages and had unstable employment records during their careers. The pressure of meeting the debt bill compounds if they're living on a fixed income, such as Social Security benefits.

Several factors account for the rise in debt among older Americans. Cutbacks in the social safety net is important. So are "increases in expenses, most recently, due to inflation," says Odette Williamson, senior attorney with the National Consumer Law Center. "And it has to do with the fact that older adults are aging with just fewer resources. Before, we had pensions. Now, not a lot of people have that and so they're just aging with less income and more debt."

One powerful theme behind the rise in debt is the cumulative impact of a lifetime of economic insecurity, which leads to borrowing money to make it through hard times. The stress of meeting debt payment falls hardest on older people of color and older women living on fixed incomes.

For instance, the Employee Benefit Research Institute, a Washington D.C., think tank, calculates that families with minority heads of households earning the median income or less were significantly more likely to have debt payments accounting for more than 40% of their income. Debt payments make it harder to save while working and drain scarce resources during retirement.

"I also want to put an emphasis on those who are most vulnerable, the low-income seniors — you know, the Black and Brown elders, women and those without pension benefits," says Tonia Brinston, owner of SLAP Financial Consulting (SLAP stands for Sounds Like A Plan.) "They face higher financial insecurities, and they have to be realistic about systemic factors, for instance, racial wealth gaps, wage gaps, caregiver responsibilities, medical debt disparities and lack of access to retirement planning. That makes some groups more vulnerable than others, and these all compound over a lifetime and become debt in later years for that population."

The other long-term debt theme that emerges from studying the trend is how easy it became to borrow, even for those living on low and unstable incomes. The history of consumer finance in the U.S. is one of increased access, more choice, more DIY finance and, perhaps most important, greater financial risk for borrowers.

"If you look at the innovation in financial markets, a lot of innovation is on the borrowing and debt side. We have found so many ways for people to borrow, the most recent one being buy now, pay later," says Annamaria Lusardi, a senior fellow at the Stanford Institute for Economic Policy Research and director of the Initiative for Financial Decision-Making at Stanford University.

"We have more access to mortgages, to credit cards, to many forms of debt, right?" she adds. "And this might have also given rise, therefore, to taking up more debt. But some of this debt might be problematic."

The evidence is strong that credit and debt replaced income growth at a time when stagnant or declining incomes were the lived experience for many low-and middle-income American families.

"In short, as Americans have been given more options and have been asked to make their own financial decisions, they remain ill-equipped to make choices that foster household financial health or contribute to the development of a healthier national economy," write scholars Andrea Ryan, Gunnar Trumbell and Peter Tufano in "A Brief Postwar History of U.S. Consumer Finance," an article published in the academic journal Business History.

Clearly, reversing the debt trend isn't easy and there are good reasons for concern that financial standards and guardrails will deteriorate further. Financial products and services are increasingly complicated, and there is compelling evidence that few people are well equipped to make the kind of financial decisions that will keep household balance sheets healthy over time. "Decisions are increasingly complex," says Lusardi. "And decisions are very consequential."

Financial literacy programs are useful. A familiarity with basic financial concepts can help people navigate saving and borrowing decisions better. For example, economists Lusardi, Olivia Mitchell and Noemi Oggero examined the debts of people aged 51 to 61 and they found that individuals with a better grasp of finance were less likely to carry excessive debt, be contacted by debt collectors or carry medical debt and student loans.

That said, financial literacy can only go so far, especially for people who live on low and unstable incomes from multiple jobs. Odds are that financial innovators will devise new and clever ways to make it even easier for people to borrow. A far-from-comprehensive reform list with the aging of the population in mind would include efforts to bring every worker into the retirement savings system while offering greater income security in retirement. The same goes with universal health insurance. Policymakers and financiers could focus much more on ways to shift financial and economic risks away from fragile households to society.

Editor’s note: This article is part of our “Debt Free” series, a Next Avenue initiative made possible by a grant from the RRF Foundation for Aging.

Chris Farrell is senior economics contributor for American Public Media's Marketplace. An award-winning journalist, he is author of the books "Purpose and a Paycheck:  Finding Meaning, Money and Happiness in the Second Half of Life" and "Unretirement: How Baby Boomers Are Changing the Way We Think About Work, Community and the Good Life." Read More