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Substantial debt may arise from unlikely sources

By Cara Henis

Most Americans attribute their household debt to a love of cheeseburgers, Hollywood movies and expenditures made for the sake of fashion. However, purchases like those aren't necessarily causing the highest levels of debt, despite what most Americans may think, according to a study conducted by Demos, a liberal think tank. Substantial debt may arise from unlikely sources

Demos' July 2009 report states that some oft-cited reasons for credit card debt do not necessarily lead to the greatest levels of debt stress -- or in other words, the most burdensome debt load.

More than half of the respondents, who were sampled from low- and middle-class households, said costs related to health care were partially responsible for their debt. Around 48 percent of households said that smaller, nonessential purchases such as eating out and going to the movies were also factors contributing to their debt. Car repairs ranked third, with 41 percent imputing their debt on that type of expenditure. Other expenses such as household appliances, home repairs, college tuition for a child and medical expenses were also listed as causes of revolving credit card balances. 

There is no doubt that the reasons listed above can contribute to lofty credit card balances. However, when looking at the purchases that cause the most burden or debt stress -- measured as the ratio of credit card debt to income-- the main culprits weren't the reasons most often selected by respondents.

Of the top three sources of debt selected by families -- medical costs, nonessential purchases and car repairs -- only car repairs were determined to impact debt stress in a major way, according to the study. The higher the debt-stress ratio, the more difficult the debt will be for a family to pay off. Other causes of substantial burden include: financing rent, groceries and utilities, helping relatives pay off their debt and job loss.

"It is consumers who take on credit card debt to cover basic living expenses, job loss, or payment of debt for a family friend who are most likely to have higher levels of 'debt stress,'" the report concluded.

How "stressed" are most Americans? The report determined that low- or middle class households have a debt stress ratio of 0.24, meaning that their debt load is about 24 percent of their yearly income. Data compiled by Forbes this May support that finding and go on to suggest that debt stress varies geographically, and on average, families in debt owe about 22 percent of their income. 

According to the Demos report, reliance on credit cards to cover basic expenses or use as a safety net has increased from 2005. Those who use their cards as a safety net are more likely to have higher levels of debt.

"The results are clear," said Tamara Draut, vice president of policy and programs at Demos and co-author of the report, in a press release. "Households are turning to high-cost credit cards to keep afloat."

The Demos survey measured responses from 1,205 households that qualified as low or middle class and had accrued credit card debt for three months or longer. The reported margin of error is 3.73 percentage points.

See related: 9 things you must know about debt consolidation, Is it possible to pay off debt TOO quickly?, Prioritize payments wisely to knock down debts, 8 things you must know about credit card debt

Published: August 7, 2009


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