Why Does Lower Income Lead to More Debt?

Debt is a fact of life for many Americans. According to the website CreditCards.com, the average household with credit card debt owed more than $15,000 in 2009, which includes people at all income levels. It is not surprising that low-income households have a lot of debt as well. Lower-income households are less able to afford the necessities of life, so they often take on debt to cover what their wages cannot. As their debt level goes up, so does the interest rate they will pay the next time they need to borrow money, creating a cycle that is difficult to escape.

Wages

In recent years, workers have struggled to get higher wages, particularly on the bottom rungs of the income ladder. According to the Economic Policy Institute, wages have remained relatively flat since 2003, especially for lower-income earners. When their paychecks do not go far enough, families earning low incomes often turn to credit cards and other forms of borrowing with expensive repayments, like payday lenders.

Cost of Living

While wages have remained stagnant, the cost of living continues to increase. The living wage calculator made by the Geography Department at the University of Pennsylvania states that in many communities, families with low-wage earners do not make enough to cover their expenses based on the average cost of living where they live. While it is usually recommended that no more than 30 percent of one's income go to housing, in some cities, low-income families pay 50 percent or more of their wages for rent.

Subprime Lending

Lower-income individuals are less likely to get traditional financing when they need to make big purchases like cars and houses, and instead must turn to subprime lenders. Subprime lenders charge interest rates that are as much as double or even triple conventional rates. With interest rates as high as 30 percent in some cases, this makes payments much higher and leads to a greater amount of total debt.

Rent-to-Own

Certain industries cater to low-income people and actually charge their customers substantially more than the items would cost elsewhere. Lacking cash, low-income people are more likely to buy electronics and appliances from rent-to-own stores. Consumers are able to buy items such as televisions or dishwashers with payments as low as $10 a week, but rarely know that the total annual interest rate works out to over 200 percent. This results in greater total debt and a greater amount spent on debt repayment.

Health Care

Many low-wage jobs are part-time, which means they rarely offer health insurance benefits. People earning low wages may also choose not to buy health insurance because they cannot afford the premiums, but they may not qualify for Medicaid. Hospitals will treat people without insurance, but still require them to pay after receiving services. Going without preventative health care also means that many problems become much worse by the time low-income people see a doctor, making treatment more expensive. Therefore, whenever low-income people need medical care, it usually ends up resulting in more debt.