America's middle class has money problems — but we can solve them

A river of ink has blackened the nation’s newspapers over the emergence of the “angry” Trump voter and the young acolytes who felt “the Bern.” Suffice it to say, a lot of people on both sides of the political spectrum feel abandoned by institutions that should be serving them better — government, education, even the financial industry — and they were willing to send that message at the polls.

When it comes to finance in particular, there is a hidden divide emerging in the United States, a fault line that splits within the already hollowed-out middle class. On the safe side stand those productive Americans who have prime credit scores of 700 or better. They have full access to financial services and products that lubricate day-to-day living and offer opportunities for growing capital. They are, by far, the minority.

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On the far side stand those productive Americans who have non-prime credit scores. They are shut out of traditional financial services products. For example, they can’t simply go to a bank and get a personal loan. They live their financial lives against a stiff headwind. According to one of the major credit bureaus, as many as 44 percent of the U.S. population hold nonprime credit status. Another 22 percent have no credit score at all.

 

We need to look at the implications of these challenged Americans and find solutions because — as recent elections have shown — they aren’t going away.

The problem’s scope

Like water to the fish, people seldom understand what credit does for them until they find themselves without it. Without the flexibility of credit, nonprime Americans have to overcome unexpected expenses with their savings. Yet, it has already been widely reported that 40 percent of Americans couldn’t come up with $500 without selling something or borrowing money. Unfortunately, 45 percent of nonprime Americans say that they were turned down for credit in the last year.

Much of this comes through no fault of their own. Income volatility in the age of the gig economy can make is much harder to save. Layoffs can affect them more often. They are more likely to have more people in their households, including elderly parents. Pile on unexpected expenses such as automobile repairs or medical costs, and these productive Americans can easily fall into the ranks of the nonprime.

Using credit as a tool

“What’s the problem? If you have a poor credit score, perhaps not having access to credit would be best for you.” That thought belies a basic assumption that a person’s credit score is something akin to a moral evaluation of a person’s character. The reasoning leads to the belief that steeling oneself to the necessary austerity or discipline would allow a nonprime American to slide right into the comfortable status as a prime credit holder. If it were so easy.

More than a third of nonprime Americans say that they can’t make progress because of the lack of credit. Progress out of the ranks of the nonprime can be a hard slog. The most effective way to raise your credit score is to responsibly pay off a loan that reports to credit bureaus. Unfortunately, nonprime applicants don’t qualify for many of those loans, furthering their economic isolation.

More than just finances

The effects spill over into other parts of their lives. Many companies pull credit reports as part of the background checks during their hiring processes. Those with lower credit scores are six times more likely than their prime counterparts to have been denied a job in the last 12 months because of their credit scores. At best, this adds some weeks to a job search. At worst, this might mean a less desirable — or less lucrative — job.

Nonprime Americans also may not be able to live where they want. They are 12 times more likely to say they were denied an apartment because of their credit. This affects commute time, social life and even the schools their children attend.

Nonprime Americans can’t easily be dismissed as an unfortunate subset. They are nearly half the U.S. population. And, their influence may reach beyond their size. Even though their financial resources don’t favorably compare to their prime counterparts, they are just as likely to say that their friends and family rely on them for financial help.

What we can do about it

Is it any wonder that nonprime Americans are 50 percent more likely to admit that their current economic situation is worse than when they grew up? Not only are they struggling, in generational terms, they appear to be slipping.

We can keep our heads in the sand and pretend that the issue doesn’t exist, but that is unlikely to heal what amounts to a festering wound on the body politic. We need to stop pretending that the only valid issue in economic justice is income inequality. We need to pay attention to more than just “the poor.” A vast chasm separates two sets of productive Americans, and it’s based on credit scores.

We need to stop thinking of credit as either a luxury for the privileged or a curse to the disadvantaged. Credit is a tool that can be abused or used effectively. In this day and age, it is a tool almost as essential as a smartphone. We must be clear-eyed about what a credit score is and how it should impact people’s lives. Credit scores no longer just dictate whether one can get a mortgage. It is increasingly determining where people live and what jobs they can land.

We need to promote public policy that encourages the private sector to generate jobs with reliable and predictable income. We need to reverse the dependence our economy has on part-time jobs by removing the incentives that encourage companies to trade full-time employees with part-time positions.

We need to encourage financial services innovation for consumers who are nonprime, disadvantaged, or on the economic margins. Technologies exist that can help nonprime consumers break through the barriers that are holding them back. Let’s encourage the use of these tools.

Unless nonprime Americans can reclaim their financial footing it will become increasingly difficult for them to remain productive in other aspects of their lives. If we are not careful, this new middle class will stop being the backbone of our communities because they will fold in on themselves as they work against a headwind that is increasingly severe.

Jonathan Walker is executive director of Elevate’s Center for the New Middle Class.


The views expressed by contributors are their own and are not the views of The Hill.