OPINION: Paycheck-to-Paycheck Living Is ‘New Climate Crisis’

Sept. 22, 2022 — As various government agencies and reports use slight inflationary easing to show the economy isn’t in such bad shape, there’s an unescapable chill in the air, and it’s not just winter. It’s the cold reality that living is less affordable than ever.

To track these trends, PYMNTS has partnered with LendingClub on the “New Reality Check: the Paycheck-to-Paycheck Report,” an ongoing series tracking how Americans at various income levels and in different demographics are affording — if just barely — the cost of living.

In a conversation with PYMNTS’ Karen Webster, LendingClub CEO Scott Sanborn pushed past recent marginal improvements to Labor Department inflation numbers, pointing to the fact that credit card balances are growing, delinquencies are rising and we don’t have the full picture.

What remains unspoken, he said, “is the way they report delinquencies is on their entire outstanding percentage of delinquent loans on their outstanding portfolio. The thing about credit cards is I think the average age of the balance is between five and seven years. You have this massive amount of balance that’s old, that’s very stable.”

While personal loan delinquencies are not apples to apples as a credit card comparison, he said that “if you look by vintage, the quarterly [credit] delinquencies are fanning like crazy, and none of them are talking about it.”

Portfolio delinquencies may look okay, but that’s a function of time and new balances which haven’t had time to hit issuers yet.

“Just compare the first six months of credit cards issued in Q2 of this year versus the first six months in any of the last 5 to 10 years,” he said. “They look remarkably worse, but nobody’s talking about it.”

See also: NEW DATA: US Consumers Face Emergency Expenses 3.5x Larger Than Fed Estimates

Webster marveled at the fact that the Apple Card is being offered to subprime borrowers with scores as low as 620 to 660 given that backdrop. Sanborn sees that as an unavoidable buy-on terms trap that manufacturers/retailers like Apple are now stuck in.

He said, “As a retailer, the idea that somebody walks into the Apple Store and says, ‘I’d like to buy a new iPad,’ and you say, ‘No, I’m sorry, you can’t have one,’ that’s the business of extending credit. It’s super painful for people who aren’t in the business of credit.”

To keep that machine making sales and not declining brand loyalists, Apple and others are demanding and committing to approval rate minimums from their finance partners — in Apple’s case, Goldman Sachs — some of which end up in that delinquency pile.

‘A Fundamental Misunderstanding’

On the larger issue of perceptions around paycheck-to-paycheck living in America, the most recent New Reality Check study found that 59% of U.S. consumers lived paycheck to paycheck in July, down from 61% in June. However, on the 12-month view, it trended up from 54% in July 2021.

These consumers exist on a continuum of living check to check, from comfortably handling monthly expenses to struggling to meet rising costs, with more now falling behind. Asked why paycheck-to-paycheck consumers are often written off as “poor” or irresponsible, Sanborn sees decades of pile-on effects that erased hard-won benefits like pensions as the real culprit.

“There’s just a fundamental misunderstanding,” he said. “There’s room for interpretation on what does it mean to live paycheck to paycheck? And if what you think of living paycheck to paycheck is you use your paycheck to cover only 100% discretionary items and then you’re out, that is a definition. But the reality is, who’s to determine what’s discretionary?”

Learn more: How Did $1,400 Become the ‘New’ Average Emergency Expense?

Running down the list — transportation, dining, contributing to 401k and HAS plans — he said these could be considered “discretionary” as much as date night, underscoring the confusion.

Here again, Sanborn invoked perception versus reality. Noting that “$370 billion worth of deposits left the system — that’s a record, that is people tapping into their savings,” he said it’s also clear in retail sales trade-downs and rents that are now up 15% year over year.

“Back to this point of being poor and living paycheck to paycheck are not the same thing,” he continued. “Yes, the inflation over the last year has been acute, but over the longer arc of the last 20 years, cost of housing, cost of healthcare, cost of education are all going up exponentially, and over that entire 20-plus-year period, wages have only recently in the last two years started to move.”

Paycheck-to-Paycheck Living Hits Crisis Levels

His underlying point is that perceptions of paycheck-to-paycheck consumers are hopelessly outdated and misaligned with the financial realities of 2022, and even prior years.

Illustrating his point, he said, “If you are able to have a credit card that has a balance, you’re credit worthy. Equating it to whether it’s a lower income [individual] or lower credit quality is not accurate. The data does not support that. Why else would 54% of Americans have credit card debt that they do not pay off? If they had the capacity to pay it off, they would.”

In a move to give struggling consumers options, LendingClub acquired Radius Bancorp in 2021, adding savings accounts to its portfolio in a bid to help consumers boost their financial health.

Sanborn said, “We’re helping them legitimately find savings by offering one of the highest rates possible on the savings account in the country. That’s the commercial aspect. But the human aspect, the broader the policy aspect is we’re all talking about the climate crisis and that’s real. This is also a crisis, and it’s also real, and it is also happening. We have this massive bubble of people heading toward retirement that are not going to be able to afford retirement.”

Conceding that there’s no silver bullet solution, Sanborn believes housing, healthcare and retirement are three major areas deserving public-private action with urgency.

Courtesy of PYMNTS.com