43% of Struggling Households Can’t Afford Essentials Without Credit, Study Finds

New analysis challenges conventional assumptions about consumer credit reliance, revealing that financial stability — not merely income — is the primary determinant of how consumers use credit, from lifeline necessities to strategic rewards.

The PYMNTS Intelligence report “Financial Lifestyles Shape Credit Reliance” highlighted a more complex relationship between consumers’ economic standing and their engagement with credit products than traditionally understood.

The report, based on a survey of 2,298 consumers conducted in December, categorized individuals into three financial lifestyles: those who do not live paycheck to paycheck; those who live paycheck to paycheck comfortably; and those who live paycheck to paycheck and struggle to pay bills. This framework revealed disparities in credit usage patterns.

While financially stable individuals may use credit extensively to maximize benefits like rewards, those facing financial strain often depend on it simply to cover essential costs. Understanding the distinct behaviors and needs of the struggling paycheck-to-paycheck consumer is crucial for financial institutions.

The data indicated that consumers’ financial lifestyle dictated not only the necessity of credit but also the volume of spending covered by credit and the types of credit products used. Credit played a role for many consumers, covering approximately half of both essential and nonessential spending among credit users overall. However, this usage varied by financial stability.

Key data points from the report include:

• Forty-three percent of credit users living paycheck to paycheck with difficulty paying bills said they could not afford essential expenses without credit. This was over eight times the rate of credit users not living paycheck to paycheck who reported the same dependence. Similarly, this group was six times as likely to need credit for nonessentials compared to non-paycheck-to-paycheck users.
• Despite relying on credit out of necessity, struggling paycheck-to-paycheck credit users tended to use credit for a lower percentage of their total spending compared to their more financially stable counterparts. These consumers used credit for 41% of essential and 43% of nonessential expenses, potentially due to lower credit limits or a more judicious approach driven by necessity. In contrast, consumers not living paycheck to paycheck used credit for 56% of essential and 63% of nonessential expenses.
• Struggling paycheck-to-paycheck consumers were disproportionately reliant on alternative credit products such as overdrafts, personal loans and payday loans. They used these sources for 31% of essential expenses purchased with credit, three times the rate of those not living paycheck to paycheck. This gap was even wider for nonessential expenses, where struggling paycheck-to-paycheck users relied on alternative credit nearly four times as often (35% versus 8.9%). They were also more likely to use installments to split essential purchase payments, potentially for cash flow management.

Beyond these core findings, the report delved into other facets of consumer credit behavior. It examined the specific types of essential expenses most frequently covered by credit, notably groceries and out-of-pocket healthcare costs.

The research also highlighted demographic differences among those living paycheck to paycheck and struggling, identifying disproportionate representation among certain generations, marital statuses, those with children, and individuals who were unemployed or self-employed.

The report also touched on the use of buy now, pay later (BNPL) options, which were more attractive to financially constrained consumers.

The post 43% of Struggling Households Can’t Afford Essentials Without Credit, Study Finds appeared first on PYMNTS.com.