When Does Debt Become a Burden? Understanding Debt “Tipping Points” and their Implications for Household Welfare
(Poverty and Income Policy)
*Names in bold indicate Presenter
Understanding the role that consumer debt plays in both the well-being of the household and the overall economic health of the country is complicated. Restricting access to credit can result in households being unable to finance necessary purchases and can limit a necessary financial lifeline households may rely on in emergencies. Yet it is clear that, for many households, debt can also lead into financial traps can result in long-term harm to their financial health. Further complicating this issue is that not all consumer debt is created equal: Credit cards, payday loans, student loans, and medical expenses all have different fees, interest rates, and regulatory obligations that may lead to different types of debt affecting households in different ways.
Issues surrounding consumer debt have been an almost permanent fixture on policymakers’ agendas, and a common refrain in policy discussions is the need to balance regulations surrounding credit usage with the goal of ensuring credit access for those who may benefit from it. To help untangle the complex question of the relationship of consumer debt to household welfare, this panel presents three papers that offer an in-depth look at the relationship between debt, household characteristics, and financial outcomes.
The first paper examines different ways of measuring the “tipping point” of debt, or the point at which debt becomes unsustainable and results in an increased likelihood of debt default. This paper constructs different measures based on the dynamics of the monthly debt payment to after-tax income ratio. Preliminary results suggest that some of these measures have some predictive content when compared to alternative risk measures such as a FICO score.
The second paper
The third paper presents an exploration of how individual financial knowledge can mitigate the risk debt default using the case of medical debt, one of the most common forms of debt in collections. Using the National Financial Capability Study, this paper finds that those with high financial knowledge are less likely to have past-due medical debt than similar people with less demonstrated financial knowledge. However, self-reported financial education as measured in this study is not associated with a reduced likelihood of having past-due medical debt.