Inflation, Disappearing Stimulus Payments Push Paycheck to Paycheck Consumer Ranks Higher

The holidays are upon us and beyond the festive urge to spend, some troubling signs point to the fact that if we keep charging the gifts to the plastic and virtual cards, the paycheck to paycheck struggle to pay the bills will persist, Scott Sanborn, CEO of LendingClub, told Karen Webster.  

Given the fact that, as estimated by PYMNTS and LendingClub, 131 million Americans are living paycheck to paycheck, some trends are headed in the wrong direction. The percentage of consumers who fit within this group is on the rise, from 52% earlier in the year to a recent 57%.  

Sanborn noted that the recent gains in the paycheck to paycheck population come as government support — in terms of unemployment benefits and stimulus checks — has been waning. Inflation is also on the rise (at more than 5% in recent readings) which means paychecks do not go as far as they once did. The data also show that the number of individuals who are living paycheck to paycheck and struggling to pay the bills remains on the rise.  

Recent data from the New York Federal Reserve show that credit card debt gained $17 billion in the third quarter of this year, and total household debt — representing a slew of obligations from mortgages to auto loans — topped $15 trillion, a record level.  

The ripple effects are extensive, as those living paycheck to paycheck worry more about adverse financial impacts and job security than their financially stable counterparts. Nearly two-thirds are highly concerned about the health, financial and social effects of the pandemic, which outstrips half of the financially secure individuals voicing similar demands.  

Observed Sanborn: “This is not a very positive — but probably not all that surprising — outlook.” At a high level, he said, less income and more expenses — where even the most standard, everyday bills are higher than “normal” (and in many cases, childcare is a renewed expense as people go back to the office) — results in high-pressure situations.  

“It’s not surprising that cash flow is getting pinched,” said Sanborn.  

Read here: New Data: Uptick in Paycheck to Paycheck Living Pegged Mostly to Financial Fears  

That pinch is being experienced by all manner of demographics, across all income profiles in the U.S., said Sanborn. In fact, as he observed, the data belies the conventional wisdom that only lower-income individuals live paycheck. In fact, about 40% of people with incomes over $100,000 fit within the paycheck-to-paycheck cohort. About 12% of those respondents report struggling to make ends meet. Simply put, said Sanborn, consumers, by and large, don’t have the cash cushions in place that they once might have had.  

Looking ahead, some variables from this past recession make it tough to gauge just what the credit and debt picture will look like after the holiday season. As Sanborn noted, this recession was different, given its speed and severity, marked by a pronounced snapback. Lenders are saying they are back to pre-COVID underwriting standards, said Sanborn, and unemployment is low.   

“We’re going to have to wait and see, as the government support ends,” said Sanborn, “how loan performance endures over the next 12 to 24 months.”  

Firms like LendingClub, he said, can give people insight and visibility into the state and trajectory of their expenses. That type of transparency is especially important as we enter the all-important holiday shopping season. There’s a propensity to spend, to satisfy the pent-up demand that’s mounted over the last 18 months as businesses were shuttered and we were all at home. Sanborn cautioned that though there’s at least some caution out there, in terms of returning to stores, we’ll see increased credit card spending and likely a greater embrace of buy now pay later (BNPL) options at the checkout.  

On that last payment method, which is exploding, Sanborn cautioned that the BNPL industry, in general, is marked by a slew of providers but no agreed-upon framework as to how buy now pay later debt should be offered at the point of sale, or how consumers can be educated about the risks.  

As Sanborn noted, “The role that a financial partner like LendingClub can play is helping people understand their aggregate set of obligations … How does that track against their income coming in and help keep them on track and find opportunities to save?” Platforms also can help better align bill payments with expenses, he said — key obligations such as mortgages and student loans, for example — so that the cash flow pinch is alleviated, leaving some room for budgeting.    

Getting a sense of what’s leftover to budget, said Sanborn, can lead consumers to be a bit more thoughtful about how they are extending (or perhaps overextending) themselves. The consumer with $15K in credit card debt, with interest rates at 21%, should focus on reducing that burden while building up a cash cushion that can help weather shocks (and only then should people think about bitcoin, as Sanborn noted, a bit tongue in cheek).  

As Sanborn told Webster, “If you’re living paycheck to paycheck today, you’re not going to be ready for retirement tomorrow.” The paycheck to paycheck pressures, he said, represent “a train that’s moving toward a place that isn’t great — if we don’t get some solutions in place.”