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So much of the American economy right now seems to come down to perspective.

The land of the free has had the strongest economic recovery when measured by GDP in 2023, particularly among all G7 nations. We regained all economic losses following the pandemic, and actually surpassed all pre-pandemic levels. Inflation has even fallen to three percent, as of early September.

But the fact remains consumers still find themselves falling further behind: according to Fox Business, the effects of earlier inflation rates, mortgages over 7 percent, and credit card APRs breaking 20 percent have cornered all consumer income groups into living paycheck-to-paycheck.

“In July 2023, 61 percent of U.S. consumers live paycheck to paycheck, unchanged from 2022, but 2 percentage points higher than July 2022,” says money expert Alia Dudum to Fox Business. “Generally, more consumers of all income brackets reported living paycheck to paycheck in July 2023 than last year.”

And those conditions have predictably affected the lower paid consumers the most. The number of lower-income consumers living paycheck-to-paycheck – those earning less than $50,000 per year – increased the most, rising from 74 percent in July 2022 to 78 percent in 2023. For consumers earning $50,000-$100,000 annually, 65 percent lived paycheck-to-paycheck in July 2023, compared to 63 percent in July 2022.

Contrast those annual figures with the share of high-income earners: for those with more than $100,000 in annual income, living paycheck-to-paycheck rose just 1 percent, from 43 percent to 44 percent.

These lower-income individuals have been hit hard by price spikes, especially for food and other primary staples, since those expenses account for a higher proportion of their budget, according to recent studies published by the University of Pennsylvania’s Wharton School.

All of which is to say that a majority of adults, 52 percent, including high earners, claimed they have felt more financially stressed since before the pandemic began in early 2020, according to the Your Money Financial Confidence Survey by CNBC in March of this year.

Unfortunately, there always remains an easy and accessible outlet for consumers when they get hit with the urge to buy, and thy name is credit.

Photo: Andre a Picquadio | Pexels

Defaulting to credit card spending

Speaking with CNBC in the spring of 2023, NAFCU chief economist Curt Long reminded consumers that “Consumer spending represents more than half of the economy, so if consumer spending is strong, that is, generally speaking, enough to keep the economy from slipping into a recession.”

There’s no doubting Mr. Long, but at the same time, poor consumer habits have a way of rearing their ugly heads to ruin a good thing. While consumers are experiencing higher costs of living and slow wage growth, households are still spending more and saving less. According to the Bureau of Economic Analysis, the U.S. savings rate had dropped to 3.50 percent by July 31, 2023, less than half the historic national average of eight percent. The days of the record-breaking 25 percent savings rate during the pandemic are long gone.

The challenge for credit unions, and every other financial services institution for that matter, is reminding members to be diligent in their financial discipline and build strong habits in order to resist the temptation to lean too much on their credit card spending.

This also represents the opportunity for credit union members to explore their cooperative’s various financial resources like digital small-dollar lending and buying themselves time to reestablish their savings habits. They can work with a staff member to lay out a financial path and regular routines for improved long-term financial consistency and health habits.

But it’s still a rickety flight of stairs, those credit cards. According to the Federal Reserve Bank of New York, U.S. consumer credit card debt rose to an all-time high of $1.03 trillion as late as the second quarter of 2023.

“The reality is that many Americans are using credit cards as a crutch instead of a tool,” Dudum clarified to Fox Business. “Americans have an average of four credit cards and are swiping on those cards without thinking about the consequences of carrying high-interest credit card debt at variable rates.”

With more than half of consumers using their credit cards to afford their daily habits and lifestyles, it also means they’re dipping into savings, making them all the more vulnerable. “Budgets are very stretched and, for a lot of households, credit cards are filling the gap,” says Greg McBride, Bankrate’s chief financial analyst.

The mainstream financial banking system has finally welcomed a more financially-inclusive philosophy as the swift growth of small-dollar lending – especially through mobile fintech – has enabled tens of millions of members and consumers with lower-to-no credit scores to borrow securely, and with cooperatives with a vested interest in seeing them succeed with those loans. These small-dollar loans, especially the NCUA’s Payday Alternative Loan (PAL) program, would provide your credit union members robust consumer safeguards, much lower prices like APRs, flexible repayment terms, and regular payments that take up a much smaller share of members’ income.

“Income disruption and unexpected expenses are more common in [low-to-moderate income] households, and quick access to a loan can make all the difference,” said Michael Barr, vice chair for supervision with the Board of Governors at the Federal Reserve, to Pew Research. “With proper safeguards, unsecured small-dollar credit to consumers with less-than-prime credit scores can be very important in helping people meet this need.”