What Exactly Causes “Bad” Credit

Despite headlines about economic gains at the national level, some members of the New Middle Class are struggling to fund basic elements of an American lifestyle that previous generations often took for granted, like putting their children through college and supporting their families’ medical needs.

A May 2019 report from the Federal Reserve indicates that “areas of financial distress” exist. With this in mind, the Center for the New Middle Class conducted a survey to help determine the root causes of a non-prime credit score.

Perhaps unsurprisingly, the answer is not straight forward. Life does not follow a linear path, nor do[RF1]  our finances, nor our credit scores. The study does, however, help us isolate the major drivers of credit stress, but perhaps most tellingly we learned that it is the combination of two or more factors that lead individuals to bad credit.  

The four most common categories (all of which the Center has looked into in the past or is conducting research at present on) were:

1. Job loss/loss of income
2. Too much debt/overspending
3. Unpaid/disputed bills/expenses
4. Medical related costs (research being conducted now)
    

Digging deeper: A perfect storm of credit ruiners
 
Non-prime consumers are 86% more likely to experience multiple factors that negatively affect their credit score compared to just one. 80% of respondents reported that one or a combination of the three categories, job loss, too much debt, or medical expenses as the factors behind their nonprime status. For example, of the 23% of respondents who cited medical expenses as one of the reasons for their non-prime credit, 75% also experienced an income drop, severely complicating their ability to manage and cover those expenses:
 
“I got cancer a few years back and trying to rebuild my score now, also changed my job, wife also lost her job during this time. Now I am working with my bank to fix my score.”
 
“Had a back injury at work and got behind on bills and it affected my credit report. My monthly income was cut in half and had medical bills on top of the bills I already had.”
 
Striving to prosper in the face of adversity
 
Factors that cause credit scores to dip below the “prime” threshold are often beyond a consumer’s control[RF2] : an unforeseen medical emergency, loss of a job due to downsizing or restructuring, actions of a partner or family member that have a domino effect on their own finances.
 
The survey results demonstrate various causes and consequences associated with having a non-prime credit score. Understanding the diverse and nuanced experiences of Americans with non-prime credit scores is critical to serving the needs of the New Middle Class–and improving Americans’ overall financial well-being.