- Consequences of bad credit can further hurt financial reality for non-prime Americans
FORT WORTH - May 21, 2019 - Job loss and medical expenses are the leading factors causing Americans’ credit scores to drop, according to new research by Elevate’s Center for the New Middle Class (CNMC). The CNMC is a research body that studies the relationship between credit and everyday life, focused on Americans with credit scores below 700 (called non-prime credit). At this level, Americans begin to lose access to traditional credit products, like personal loans and credit cards, and everyday life becomes harder as a result.
According to the new report, 55% of respondents cited job loss or reduction in work hours as the reason why their credit score dipped below 700. Nearly a quarter (24%) cited medical bills as the primary cause. Following these leading factors, a variety of typical, seemingly innocuous expenses follow, including repairing a car (11%), leaving home for the first time (6%), and putting a child through college (5%).
“A dramatic shift is underway in America’s middle class,” said Jonathan Walker, executive director of the CNMC. “No longer can the average American put their children through college, start out on their own, or care for their families’ medical and housing needs without facing severe financial stress. These seemingly typical expenses can be enough to push a person into debt and erode their credit score.”
Causes and Consequences
Factors surrounding a drop in credit score can be categorized into two groups: causes and consequences.
For most non-prime consumers, it’s the combination of multiple factors that hurt their credit score and ruin their financial livelihood: Non-prime consumers are 86% more likely to experience multiple factors that negatively affect their credit score compared to just one. For example, of the 23% who mention a medical reason, about three-quarters (75%) also experienced an income drop, severely complicating their ability to manage and cover medical expenses.
“A strong theme emerges when looking at the causes of becoming non-prime: they are often entirely outside of a person’s control,” said Walker. “Non-prime Americans are not inherently irresponsible people, and in fact, we’ve found that they are trying in earnest to improve their financial lives.”
Despite the uncontrollable causes and often dismal effects of a non-prime credit score, nearly half of respondents report an increase in their credit score over the last 12 months, suggesting a strong determination to improve financial health.
Qualitative Consumer Feedback
When asked to tell their stories of how they became non-prime, Americans’ responses typically aligned with one of four themes: job loss/loss of income; too much debt/overspending (particularly in the past); unpaid/disputed bills/expenses; and medical related costs. Underpinning all of these causes are the fact that they are outside of a consumer’s immediate control.
Selected quotes from consumers are below. More can be found in the complete study.
“I recently lost half of my income and fell behind on multiple bills such as 4 credit cards. I was receiving child support and it stopped. This caused me to miss several payments for 1 month and my credit score dropped dramatically.”
“Got sick and had a lot of medical bills that I couldn't afford. They were longer than 5 years ago I figured it wouldn't affect my credit but it did. Trying to get my credit back up but it’s hard when I can’t get anyone to give me a LOC.”
“Housing market crash. Major overpayment of a house that was way too expensive and still not worth the money that was paid for it. Unable to use harp program because not qualified (was really qualified) then home was auctioned for less than I was willing to pay.”
“Was forced to resign my employment due to not being able to accept a long distance employment transfer. Also, I was over 60 and was being forced out of the office due to that as well.”
“I lived on credit cards after undergrad and through grad school. I also maxed out two credit cards/accounts, so now my debt to credit ratio is not good with a few credit accounts.”
“Helping my kids at a time when I shouldn't have. Now those debts have been paid off and show zero balances, my credit score is moving forward. It’s moving forward at a slow pace because I have not applied for new credit and paid off many of my accounts.”
About the Research
This study represents results from a survey of 319 U.S. non-prime consumers. Interviews were conducted in September 2018 to learn about how consumers move into non-prime status.
About Elevate’s Center for the New Middle Class
Elevate’s Center for the New Middle Class conducts research, engages in dialogue, and builds cooperation to generate understanding of the behaviors, attitudes, and challenges of America’s growing “New Middle Class,” defined as those with credit scores below 700. For more information, visit: http://www.newmiddleclass.org.
Elevate (NYSE: ELVT), together with its bank partners, has originated $7 billion in non-prime credit to more than 2.2 million non-prime consumers to date and has saved its customers more than $5.2 billion versus the cost of payday loans. Its responsible, tech-enabled online credit solutions provide immediate relief to customers today and help them build a brighter financial future. The company is committed to rewarding borrowers’ good financial behavior with features like interest rates that can go down over time, free financial training and free credit monitoring. Elevate’s suite of groundbreaking credit products includes RISE, Elastic, Sunny and Today Card. For more information, please visit http://www.elevate.com.