Why Even Full-Time Workers Struggle With Expenses

A new book based on extensive research of U.S. households says income instability is to blame.

Unemployment is low, inflation is historically low and even wages are perking up, leading many observers to believe the U.S. economy is humming along nicely. So why do many Americans say they are struggling?

A new book born of meticulous, years-long research offers a fresh insight into this burning question. Month-to-month swings in income, even for those with full-time jobs, are often the cause of Americans” financial anxiety, claim the authors of “The Financial Diaries: How Americans Cope in a World of Uncertainty.”

For a stunning number of American households, both income and expenses swing 25% or more in either direction on a regular basis, leaving many families scrambling on a month-to-month basis, even if things don’t look so bad annually, the authors argue in their book and a Harvard Business Reviews essay.

Economic data tends to examine broad movements; even at its most micro, it tends to identify years-long trends. Researchers Jonathan Morduch and Rachel Schneider had a sense government statistics were missing things, so they went nano. They spent 12 months getting 235 families to track every single dollar going in and out — 300,000 cash flow events in all. The product of their painstaking research offers perhaps the clearest view yet of why even middle-class Americans find themselves living with deep economic anxiety. The book even offers up a new term — “precarity,” or precarious economic volatility — to describe the plight of everyday Americans.

One of the more bold claims made in the book: Despite all the talk about income inequality, the authors say income instability has risen even faster and is the more immediate problem.

What’s Income Instability? 

Many readers are familiar with the idea that unexpected expenses — like a health scare or major auto repair bill — can derail many households. But the book establishes another reality that might be new to many: income volatility, even among those with full-time jobs.

The book’s opening anecdote cites a research subject who works as a truck mechanic in Ohio. While he works full time, his pay relies largely on commissions and can vary from $1,800 to $3,400 each month. In bad weather, trucks break down more often. That means in the spring and fall months, mortgage payments aren’t made, and the electricity bill goes unpaid. Later, for a fee, the family catches up. (You can see how any missed loan payments may be affecting your credit scores by viewing your free credit report summary on Credit.com.)

This same problem is repeated again and again among the families studied. Morduch and Schneider found that the term “average income” is a bit of a farce, as typical families lived through five months each year with income that swings either 25% above or below “average.”

“This is creating a lot of anxiety and uncertainty that is impossible to see in the usual data,” Morduch said in an interview. About five months out of each year, incomes “weren’t even close” to average.

“Often we see the (financial) problems as a discipline problem, a failure of personal responsibility. What we’re trying to say is there’s something else going on,” he said. “The underlying conditions are really hard. It probably isn’t just about self-discipline.”

Income swings are to be expected among families suffering job loss, the self-employed or those who rely on tips, like waiters. But the researchers found a stunning rate of income volatility even among those with traditional-sounding full-time jobs.

“This was the single biggest surprise (in the research),” Morduch said. “There’s insecurity that’s because you are going to lose your job, but that’s not what’s driving anxiety for these folks … What we see is that when paychecks bounce from month to month, people can be making good financial choices but are still struggling.”

As a result, even earners who are safely in the middle class spent a month or two living as poor or “near poor,” the book says. The problem for many is better described as a lack of liquidity — getting enough cash to pay the mortgage this month — than as insolvency, or a hopeless difference between income and expenses.

“Not balancing on a high wire, driving on a rocky road,” the book says. “(There’s a) distinction between not having money at the right time vs. never having the money.”

While economists might just be becoming aware of this month-to-month struggle, the financial industry has known about it for some time. That’s one reason there are more payday lending storefronts in America than McDonald’s restaurants. (You can find tips for escaping payday loan debt here.)

Trouble Saving for a Rainy Day

The volatility problem is closely related to Americans’ lack of emergency savings. Study after study shows a large percentage of Americans don’t have the recommended three months of living expenses stored in short-term savings. Some studies show even more dire data. A stunning 46% of Americans told the Federal Reserve in 2015 they could not cover an emergency $400 expense without selling something or borrowing the money. Income and expense volatility, combined with no savings, is a perilous combination.

“Households don’t have a big cushion. Into this mix is the reality that levels of income have not risen – the bottom 50% has seen no income growth since 1980 — then you are really squeezed,” said Morduch. As a result, even in good months, earners don’t have any extra left over to build a rainy-day fund – economists say their budgets have no “slack.”

“There is a knock-on effect of diminished slack so when the budget gets hit by a car repair or the house needs a new roof, it’s just that much harder,” Murdoch said.

How did this income volatility come to pass? The authors blame what they call “the Great Job Shift.” Employers are increasingly sharing risk with their workers. That means cutting back hours, often on the spot, when times are slow. Or basing a large portion of pay on commission, as in the case of the truck mechanic. In other cases, workers rely on tipping to top-up wages that otherwise aren’t livable. In one of the book’s more frustrating scenes, as casino blackjack dealer in Mississippi describes how her income relies on events as whimsical as the nearby college football team schedule.

The subjects in the book are anonymized. Their names changes and a few other personally identifiable data points have been obscured, but otherwise, their financial diaries are disturbingly real.

How Do We Fix it? 

When asked for policy recommendations, Morduch leaps to the defense of the Consumer Financial Protection Bureau, which he says is working hard to regulate many of the short-term lending products that have emerged to services workers with volatile incomes. He says there’s also been constructive conversations with large firms about making hourly wage worker schedules more predictable, and moving away from so-called on-call workers. The “Schedules That Work Act” that would have promised some workers two-weeks scheduling notices was considered but tabled by Congress under President Barack Obama.

Other changes would help, too. Many social benefits programs are cumbersome to apply for and don’t offer much help for families who are only occasionally “near poor,” and might need help one or two months per year.

Changes that could encourage saving for short-term events would help, too. Tax-advantaged products like 401K accounts help families plan for decades in the future, but families living on the margins are afraid to use them for emergency savings because of the severe early withdrawal penalties. (You can learn more about withdrawing from your 401K here.) More flexible rules would encourage greater use of retirement accounts, Morduch believes.

“A lot of Americans wisely don’t want to lock up their money,” he said. “There isn’t enough attention paid to shorter-term policies.”

In a larger sense, Americans should probably change the way they think about income and spending, Morduch said, and many could learn from research subjects described in the book.

“The families we got to know, they think a lot about liquidity. They have a lot to tell other Americans. Mainly, prepare for a life of ups and downs,” he said.

If you’re looking for ways to keep your finances in check, we’ve got a full 50 ways you can curb and stay out of debt here

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OP/ED: CFPB Should Strengthen Its Payday Loan Rules


A few years ago, Corri Varner of Savage, Minnesota needed a new pair of glasses so she could drive to her church. She was short on funds and went to a payday lender to borrow money to cover the cost. She was loaned the money, but it came with a steep fee and high interest rate. When her loan came due, she needed to take out a new loan to cover the previous loan, plus the fee and interest. Her new loan came with its own set of high fees and interest rate. Before she knew it, Corri was stuck in a “debt trap” – being forced to borrow each month to pay off the last month’s loan.

She isn’t alone. Each year millions of Americans get stuck in similar debt traps because of predatory payday lenders.

The good news is that earlier this year, the Consumer Financial Protection Bureau (CFPB) took a first step to crack down on lenders that make high interest, short-term loans. It has drafted new rules to make sure payday lenders don’t saddle consumers with excessive fees and outrageous interest rates. But the CFPB still has the opportunity to change its rules before they take effect, and I’m urging them to stand up for consumers by eliminating loopholes in their proposed rules and making sure the rules are as strong as possible.

According to the CFPB, 70% of borrowers of payday loans are forced to take out another loan when their first loan expires. And one in five borrowers are forced to repeat this cycle ten times or more. These debt traps can rob consumers through outrageously high charges – often with interest rates of more than 300% a year. And lenders sometimes cause consumers even more financial trouble by making repeated attempts to debit a customer’s bank account, even if there’s no money in it. That can put consumers on the hook for hundreds of dollars in overdraft fees.

The CFPB’s new rules would require a payday lender to verify that a customer actually has the ability to repay a loan before it’s issued. That means payday lenders have to check a consumer’s income, debt, and other data before making a loan, to ensure the customer has the resources to repay it. A family needs to put food on the table, pay rent, or make a car payment. And the rules will also prevent payday lenders from repeatedly debiting a customer’s account if the account doesn’t have any money in it. That means payday lenders won’t be able to run up overdraft fees as some have in the past.

While these rules will be good for consumers overall, it’s important to close loopholes that could undermine their effectiveness. For example, in some cases, under the CFPB’s proposed rules, payday lenders would be allowed to make up to six loans to a person without having to do a full review of the borrower’s ability to repay. In addition, the proposed rules wouldn’t apply to some longer-term loans either. So, I’ve been pushing the CFPB to close these two loopholes before the payday lending rules take effect.

In Congress, I’m also taking on abusive payday lenders. First, I’m fighting for legislation to cap the interest rates that payday lenders can charge. Instead of charging interest rates higher than 300% a year, I think we should set a national cap on how much lenders can charge, just like the 15 states that have already enacted interest rate caps of 36% or lower. And second, I’ve been pushing for legislation to crack down on online lenders that try to skirt U.S. laws by setting up their computers in foreign countries.

The new payday lending rules are an opportunity to secure a big step forward for this country’s working families. Although there’s more to do, we should be glad that for the first time, our country will soon have basic, national standards for payday lenders. It’s an important step to stopping the debt trap cycle that payday lenders have been forcing upon Americans.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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Payday Lender Slapped With $1.3 Billion Judgment


A payday lender enterprise found itself on the receiving end of a record near-$1.3 billion judgment after a federal judge found its operators deceived consumers nationwide and illegally charged undisclosed financing fees.

AMG Services Inc., helmed by race car driver Scott Tucker, has also been banned from consumer lending and prohibited from engaging in illegal debt collection practices as part of the judgment, the Federal Trade Commission announced on Monday.

The record judgment stems from a compliant filed by the FTC back in 2012. It accused AMG’s operators of making multiple withdrawals from customers’ bank accounts and assessing a new fee each time, even though they advertised they would only charge the loan amount plus a one-time fee. For example, according to the agency, one borrower of $300 found herself on the hook for $975, even though she was led to believe that her loan would cost a total of $390. The near-$1.3 billion judgment accounts for the difference between what customers actually paid and what they were told they would have to pay on their loans, the FTC said.

As part of the ruling, Judge Gloria Navarro found Tucker was individually responsible for the unlawful conduct. Tucker’s attorneys were not immediately available for comment on the ruling. In February, he pleaded “not guilty” to criminal charges filed against him in New York over his online payday lending enterprises’ practices.

AMG Services operated a number of payday loan companies, including AMG Capital Management LLC, Level 5 Motorsports LLC, Black Creek Capital Corporation and Broadmoor Capital Partners. Borrowers who believe they are entitled to a refund post-judgment can sign up for updates on the FTC’s website.

When Taking Out a Payday Loan

Payday loans are generally known for their costly fees and high annual percentage rates, so it’s best to use them with caution. (You can find some alternatives to payday loans here.) If you do need to take one out to get you through an emergency, you should aim to pay it back as soon as possible and you should also thoroughly read the terms and conditions, so you know what you’re signing up for.

It also helps to familiarize yourself with your consumer rights. Many states have usury laws that regulate or ban the payday loan industry outright. If you think a lender may be in violation of these laws, or your individual contract, you can consult a consumer attorney, file a complaint with the Federal Trade Commission and/or Consumer Financial Protection Bureau, or contact your state’s attorney general.

Remember, too, if you find yourself repeatedly resorting to payday loans, it may help to work on your credit. A good score can help you qualify for financing with better terms and conditions. You can improve your credit scores by paying down high credit card balances, disputing errors on your credit reports and identifying your specific areas of opportunity. And, as you work to build your credit, you can keep an eye your progress by viewing two of your credit scores, updated every 14 days, for free on Credit.com.

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A New Credit Bureau Is Opening & It’s All About Payday Loans


As federal regulators continue efforts to rein in the payday loan industry, one surprising byproduct will likely be the creation of a new kind of credit bureau.

The Consumer Financial Protection Bureau has proposed new rules dealing with short-term, high-interest loans like title and payday loans. These mainly focus on preventing consumers from getting trapped in a cycle of repeat borrowing. But perhaps the most ambitious part of the plan is the requirement that lenders report loan payment results to… to what?

Traditionally, the nation’s large credit bureaus haven’t taken data on payday loans, title loans, and other similar short-term products. That means borrowers who pay them back on a timely basis don’t get the credit they deserve; and it makes it harder for them to “graduate” to more traditional loan products.

So the CFPB has called for creation of a new kind of credit reporting agency – and given them the decidedly un-sexy moniker, “Registered Information System.” But to borrowers trying to show they are worthy of credit, an RIS might sound just right.

Credit Can Be Hard to Come By

“Every time a consumer pays off a loan of any kind, their opportunity grows,” said Greg Rable, CEO of a firm named FactorTrust.  His company already collects and sells data on short-term loan borrowers, and it hopes to be one of the main Registered Information Service players when the CFPB rule is finalized. “Inclusion of alternative credit data is critical to both parties. We’ve seen people improve their credit scores – at every scoring level — by having alternative credit data available in the underwriting process. More data is better for both the consumer and the lender.”

The CFPB proposed its new short-term lending rules this spring, and what’s expected to be a cantankerous public comment period ends in October. After that, a final rule will be published perhaps a year later. The rules are likely to require that lenders examine borrowers’ “ability to repay” the loans, perhaps by forcing lenders to know more about their consumers’ debt and income status. A Registered Information Service, like a credit bureau, could be the source of such data to lenders. In turn, an RIS would also give borrowers a chance to build up a history of making good on debts. On the other hand, it might also make life harder for consumers who have failed to pay back loans in a timely way. And it creates another data stream for consumers to worry about.

A Wider Net

Efforts have been underway for years to expand the number of consumers who have credit scores and credit reports, so they can participate in the credit economy. Last year, the CFPB found that one out of 10 U.S. adults is “invisible” to the credit industry because of either non-existent or “thin” credit files.

Many would benefit from inclusion of a wider set of criteria in setting credit scores, the industry has argued. For example, in 2015, Experian released a study showing that inclusion of non-traditional credit items like utility payments would lift millions of consumers out of subprime status. It also found that including rent payment history would lift 20% of consumers out of subprime status.

Whether the RISs would help people build traditional credit remains to be seen — and could be a long-time coming, given all the parties, including the major credit scoring models and main bureaus, that would have to get on board. But their reports could make it easier for credit-challenged consumers to get a better rate on a payday loan. (To see where your traditional credit currently stands, you can view two of your credit scores for free each month on Credit.com.)

The Difficulties With Data Collection

Collecting payment data from short-term lenders is a big task. For starters, the industry moves fast.  Borrowers often have as little as two weeks to repay loans, so performance data must be compiled quickly – close to real-time, Rable said. Traditionally, credit bureaus receive monthly updates from data “furnishers” like lenders, but that would be too slow for a payday lender who might be considering a loan to a consumer who took out another one just days earlier.

Rable said he’s also worried that small lenders who don’t have systems in place will suddenly be faced with complex reporting requirements; they might have to send data to 5 or even 10 different outlets, he said.

“For a lot of these guys, this will be a brand new thing,” he said.  “For big banks, they report to one or two big credit bureaus.  …Our view is the fewer the better on the RIS side to deal with the complexity.”

Consumers will face complexity, too. Each RIS will have to develop a dispute process, for example. It’s possible consumers might have to complain about errors to each system individually – once they even discover the existence of an RIS that’s holding negative information on them. Already, disputes are a big source of headaches in the traditional credit bureaus.

While Gable favors use of more data in the short-term lending industry, he said the verdict is out on how the new CFPB rules might impact both lenders and borrowers.

“It’s yet to be determined if this is good for consumers and the industry,” he said. “Initially, it’s going to be a very big challenge for the industry.”

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How $2,500 in Payday Loans Turned Into $50K of Debt


Less than a week after Google said it was banning ads for payday loans, one man’s story is making national headlines. He’s an example of how a bit of financial bad luck can turn into a mountain of debt.

Back in 2003, Elliott Clark’s wife broke her ankle. She couldn’t work, so to keep up with the bills, Elliott took out a $500 payday loan. Then he took out four more totaling $2,500.

“I had nowhere else to go,” Clark recently told the Kansas City Star. “I had a family, a daughter in college, bills to pay … I’m an honest man.

“Those places shouldn’t be allowed to do that,” Clark added. “It’s just glorified loansharking.”

After his wife Aquila’s injury, the medical bills rose to $22,000, the Star reported, and Clark couldn’t get a bank loan with a 610 credit score. Paying back those payday loans quickly became a juggling act. Over the next five years, it would end up costing him more than $50,000 in interest, the Star reported. And the couple lost their home during that period, too.

With payments due every two weeks, he would repay one $500 note along with $95 in interest, the Star reported. At the same time, he often would then take out another $500 loan and go to the next place and do the same until all five were paid.

He would be out the $475 in interest. And he’d also face the new loans coming due. That pattern went on for five years until he received disability payments from Veterans Affairs and Social Security, the Star reported. Those amounts allowed him to finally repay the whole debt.

“And I sure haven’t been back to those places,” he said.

What to Consider Before Getting a Payday Loan

Before you apply for a payday loan, step back and consider your options. Is this really an emergency? Is it possible to wait to repair your car or pay your bills until your next paycheck?

Here are some other ways to borrow money that are often lower-interest options:

  • Negotiate a payment plan with the creditor.
  • Receive an advance from your employer.
  • Use your bank’s overdraft protections.
  • Obtain a line of credit from an FDIC-approved lender.
  • Borrow money from your savings account.
  • Ask a relative to lend you the money.
  • Apply for a traditional small loan.
  • Ask your creditor for more time to pay a bill.

If you have evaluated all of your options and decide an emergency payday loan is right for you, be sure to understand all the costs and terms before you apply.

  • Shop around for a trusted payday lender that offers lower rates and fees.
  • Borrow only as much as you know you can pay back with your next paycheck.
  • When you get paid, your first priority should be to pay back the loan immediately.

If your bad credit is keeping you from getting a credit card or qualified loan, you can start repairing your credit. Getting negative, inaccurate information off of your credit reports is one of the fastest ways to see an improvement in your scores. You can view your credit scores for free each month on Credit.com.

[Offer: Your credit score may be low due to credit errors. If that’s the case, you can tackle your credit reports to improve your credit score with help from Lexington Law. Learn more about them here or call them at (844) 346-3296 for a free consultation.]

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Google Bans Ads for Payday Loans


Effective July 13, Google is banning ads for payday loans and related products, the company said Wednesday in a statement. With this, Google will not display ads for loans that require payment within 60 days of the date of issue. In the U.S., ads for loans with an APR of 36% or higher will also not be shown.

Google disclosed this measure is “designed to protect our users from deceptive or harmful products.” The policy will not impact mortgage, car loan, student loan, commercial loan or credit card issuers.

“I think this action is as unprecedented as it is significant,” Keith Corbett, Center for Responsible Lending Executive Vice President, said in a statement. “By example, Google is demonstrating how profitable enterprises can also be ethical and supportive of financial fairness.”

According to the Community Financial Services Association of America (CFSA), a trade organization for companies that offer small dollar, short-term loans or payday advances, “These policies are discriminatory and a form of censorship. The internet is meant to express the free flow of ideas and enhance commerce. Google is making a blanket assessment about the payday lending industry rather than discerning the good actors from the bad actors.

“This is unfair towards those that are legal, licensed lenders and uphold best business practices, including members of CFSA. Companies that restrict advertising of payday loans also do their users a disservice because consumers may need access to short-term credit that they cannot get from traditional banks. According to the FDIC, 24 million households are underbanked. Thirty-five states and the CFPB have recognized the need for short-term credit products like payday loans.”

The news comes on the heels of a recent study by the Consumer Financial Protection Bureau (CFPB) indicating online payday lenders have created hazards for borrowers that lead to overdraft fees and loss of access to checking accounts. When borrowers don’t have enough funds in their accounts to pay the lenders, repeated withdrawal attempts can result in several non-sufficient funds charges averaging $185.

“In one extreme case, we saw a lender that made 11 payment requests on an account in a single day,” noted CFPB director Richard Cordray.

Last year, Facebook unveiled a similar policy to this, banning ads for “paycheck advances or any other short-term loan designed to cover someone’s expenses until their next payday.”

Payday loans can be costly and leave lasting damage on your credit report. Their short terms make the cost of borrowing high, and if not followed you can be charged expensive additional fees. In most cases, the average percentage rate (APR) on a payday loan averages about 400%, with some even as high as 5,000%.

Before you consider applying for one, know your alternative options. (You can view your free credit report once a year from AnnualCreditReport.com and see two of your credit scores for free, updated monthly, on Credit.com.)

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Have Student Loans Created a New Generation of Payday Loan Addicts?


My wife and I were watching a news program the other day when a commercial for a prescription medicine piqued my interest.

The drug was designed to treat an ailment that, as it turns out, comes from taking another prescription medicine made to treat something else.

The absurdity of that inspired me to think about other instances where this might also be the case. Because of my predisposition to view such things in a financial context, I recalled a report I’d recently read on consumer-financing trends.

It touched upon an important reason why a rapidly growing number of 20- and 30-year-olds are signing up for loans from alternative finance companies — firms that pitch payday, tax-refund, auto-title and pawn-shop loans: Because their other debt obligations are leaving them short on funds.

Researchers at George Washington University’s Global Financial Literacy Excellence Center analyzed a 5,500 subsample of millennials who participated in the Financial Industry Regulator Authority’s (FINRA) 2012 National Financial Capability Study. They found that 42% of that subsample are currently or expect to soon become alternative financing company customers.

Why are so many 20- and 30-somethings apparently willing to risk their longer-term financial security by doing business with firms that are known for charging higher rates and fees than traditional lenders?

They haven’t much choice.

The researchers found that more than half of those surveyed were carrying credit card balances. Nearly 30% were overdrawing on their checking accounts and 20% had borrowed or taken hardship withdrawals from their retirement accounts. As such, their creditworthiness is, in a word, impaired.

What’s more, since budgeting is a zero-sum game and 54% of the surveyed millennials also said that they were concerned about their ability to repay their higher-education loans, it’s reasonable to conclude that these are the debt obligations that underlie the problem. Money woes related to student loan debts isn’t all that surprising: Roughly half of the student loans currently in repayment are either past due, in default, in forbearance or being accommodated by one of the government’s many relief programs.

So it’s quite possible that the reason why alternative finance companies are in such great shape is because the loans their customers had previously undertaken are making them sick.

Which brings me back to the absurd premise of needing a second medication to counteract the first.

If we are truly concerned about the increasing use of alternative financing products by consumers with worsening credit, it would make sense to address a fundamental reason why that deterioration is occurring in the first place: student loans.

We can start by abandoning the nickel-and-dime approach we’ve taken thus far and re-price the entire loan portfolio at rates that correspond with the government’s actual costs to fund and administer these contracts, and extend their repayment durations so that installments consume no more than 10% of a typical borrower’s monthly earnings.

Student loans would then become more affordable, and, as a direct result, the need for financing products that have the potential to compromise consumers’ longer-term financial health can mostly become a thing of the past.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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