A new study by the nonprofit Urban Institute, “Delinquent Debt in America,” paints a bleak picture of the segment of the American economy whose debts and unpaid bills have been reported to collection agencies. The study claims that of the 22 million Americans with credit files, 35.1 percent, or 77 million in total – equaling 9 percent of the population – have accounts in collections, with a national average owed of $5,178. It’s much lower in Massachusetts, with Boston among the lowest incidents of people with debts in collection; but that doesn’t mean the Bay State is off the hook.
A couple of reasons why: The study evaluates non-secured debt only; it excludes mortgage debt, which for wage-stagnant households that didn’t quite grab the American Dream, is a separate problem. The study also excludes the people without credit reports – off the grid, and not in a good way – who owe debts to family or payday/pawnshop loans. So, study authors warn that low-income people may be underrepresented in the total tally of who is struggling. In Massachusetts’ Gateway Cities, which hold the most potential for economic growth, their numbers could be many.
That’s one reason that recent news reports of banks courting underbanked and low-income customers raise red flags. Just because the prospective customers are out there doesn’t necessarily mean a banking relationship will be able to help them, unless banks know the true risks. This has the potential to put banks in a difficult position vis-a-vis wanting to cultivate a new customer base, building goodwill in doing so, while paying close attention to their managements’ appetite for credit risk.
Data for the Urban Institute study was collected with the help of the Encore Capital Group, Midland Credit Management and the Consumer Credit Research Institute, but the study’s authors indicate that the views expressed in the study are their own.
In our view, it’s no mystery why the companies that successfully cater to struggling consumers price their offerings so much higher than the products offered to customers with the means to pay off their credit card balances in full every month. That’s not meant to exculpate predatory lenders; it’s just to note that the higher the risk, the higher the profit margin necessary to support it, even for enterprises with good intentions.
Additionally, the study notes, even for those with relatively small past-due balances, the lower their income level, the harder it is for them to pay it off.
The much-vaunted economic recovery isn’t in any way egalitarian. The regions in the country, and in Massachusetts, that survived the downturn best (and have roared back) were minimally affected in the first place. For the debtors across the nation in the bottom fifth, the Urban Institute study cautions, in essence, that to keep pace with the recovery at the top, they’d have to essentially fall out of a hole. And absent real job growth in the lower sectors, that’s not likely to happen.
