Living on the Financial Edge: New Debt Challenges for At-Risk Americans
Over the last year, Filene has released a series of reports on the financial state of four groups that are essential to healthy credit unions—Gen Y, pre-retirees, Hispanics, and women. The data paints a troubling picture of various American subgroups’ financial capability.
These reports rely on key data from the National Financial Capability Study to analyze significant indicators of Americans’ financial capability, including short-term and long-term debt. This research demonstrates how essential it is for credit unions to respond to the financial needs of these groups. The studies use more than 5,000 survey observations to illuminate how each group manages money and what factors play into their financial decision making.
The first report “Gen Y Personal Finances: A Crisis of Confidence and Capability” reveals the struggles Millennials face in personal financial management.
As a group, Millennials feel overburdened with debt. Two-thirds (66 percent) have at least one source of outstanding long-term debt, whether student loan, home mortgage, or car loan, and 30 percent have more than one source of long-term debt. Much of this debt is healthy, of course, but to offset this debt, they also rely on expensive borrowing methods such as credit cards, payday loans, and alternative financial services.
“Financial Capability Near Retirement: A Profile of Pre-Retirees” suggests pre-retirees and Gen-Yers have many similarities in their overall financial needs. In the years right before their golden years, 60% of pre-retirees have at least one source of long-term debt. Pre-retirees’ greatest source of debt is home mortgages (44%).
While 51% of Gen Y respondents reported having retirement accounts, nearly 30% of pre-retirees do not. Baby boomers additionally report using their credit unions less in retirement for a variety of reasons including having retirement assets elsewhere and lack of convenience.
Despite their increased prominence and presence, Hispanics, like many ethnic groups, have specific financial needs. “Financial Capability among Highly Educated Hispanics” reports that 8 in 10 highly educated Hispanics have at least one credit card, and half of these cardholders report behaviors that can damage credit scores, increase interest rates, and harm their future borrowing capacity. 35% of the respondents in the study indicated they used one or more alternative financial services (AFS) within the five years preceding the survey while 22% reported taking loans or hardship withdrawals from their retirement accounts. Very rarely does this group seek help for their financial struggles as nearly 60% feel that financial advisors are too expensive.
Just as Hispanics face distinct socioeconomic challenges, so do women. Our upcoming “The Gender Gap: Troubling Financial Capability Findings among Women” report suggests American women are not planning for retirement and overestimate their financial ability. Among women aged 51–61, only two-thirds report that they (or their spouse) have a retirement account. For respondents taking a five- question financial literacy test, only one-quarter of women are able to correctly answer the three simplest questions—about interest, inflation, and risk diversification (indicating a basic level of financial literacy)—compared to 47% of men.
How can credit unions help?
While all four groups face similar challenges related to short-and long-term debt, financial literacy, and retirement planning, consider these promising approaches:
- Effective messaging is needed to encourage baby boomers to be mortgage free in their retirement years. But in order to create impact, credit unions should also support that messaging with boomer mortgage products that offer fixed-rates and are designed to ease the mortgage burden in the retirement years.
- Debt management tactics will resonate with Millennials. Credit unions can encourage proactive debt management by understanding.
- It will be critical to offer low-cost products and services to eliminate the need for Hispanics to engage in expensive financial behaviors. Spanish-speaking financial advisors can help foster a culture of comfort and trust for potential Hispanic members.
- In light of women’s low levels of financial literacy and the unique challenges they face, channels and counseling should be directed at women. Women differ broadly over demographic categories, like age and marital status. For this reason, customized advice through counselors or remote channels should be provided.