New Data: Financially Strapped Consumers Move to Credit Card Alternatives

Consumers can’t spend money they don’t have, and right now, many are running out of cash.

The lenders that win are the lenders that give their end-user consumers what they want. As more and more consumers turn to credit to afford essentials against a backdrop where inflation continues to rise and incomes remain relatively stagnant, understanding the impact of financial lifestyles on credit use becomes increasingly critical.

A new report from PYMNTS Intelligence, titled, “Financial Lifestyles Shape Credit Reliance,” provides a detailed analysis of how different financial situations — particularly the paycheck-to-paycheck lifestyle — impact consumers’ use of credit.

Contrary to popular belief, the report finds that it is not income alone that drives this reliance, but rather a consumer’s overall financial stability and their specific lifestyle.

Financial Lifestyles and Credit Usage

For consumers who are struggling to pay bills, credit is often more than a convenience — it is a necessity. While 21% of overall credit users reported that they would not have been able to afford essential expenses without using credit, this number jumps dramatically for those living paycheck to paycheck with difficulty paying bills. A staggering 43% of credit users in this group said they could not afford essential expenses without credit. This figure underscores the importance of credit as a lifeline for those facing financial instability.

The report also sheds light on how credit is used for both essential and nonessential purchases. For consumers living paycheck to paycheck and struggling to pay bills, credit is used for 41% of essential expenses and 43% of nonessential expenses. In comparison, consumers not living paycheck to paycheck rely on credit for 56% of essential purchases and 63% of nonessentials.

This disparity in credit usage suggests that financially constrained consumers not only have lower credit limits but may also be more cautious in using credit for necessary expenses. They are more likely to use credit sparingly and, when possible, explore alternatives like installment plans to manage their finances.

Read more: How Different Consumers Use Credit to Make Essential Purchases

Understanding Consumer Credit Behavior

The study further illustrates that credit usage varies significantly depending on a consumer’s financial situation and personal lifestyle. Consumers who can comfortably pay their bills and do not live paycheck to paycheck use credit cards more frequently, often leveraging rewards and cash-back benefits. In contrast, those who struggle to make ends meet are more likely to use credit simply as a means of survival. This group may be more reliant on alternative credit sources, which come with different terms and repayment structures.

While lower-income consumers are more likely to use credit for essential purchases, the report suggests that financial lifestyle is a stronger predictor of credit reliance than income alone. The data indicates that income disparities do not fully explain why certain groups are more likely to rely on credit. Instead, the key lies in whether a consumer is living paycheck to paycheck, as well as the level of financial strain they experience.

Another key finding from the study is the growing use of alternative credit products such as payday loans, overdrafts, and buy now, pay later (BNPL) services. Struggling paycheck-to-paycheck consumers disproportionately turn to these alternatives, with 31% of their essential expenses purchased through alternative credit products, a rate three times higher than those not living paycheck to paycheck. BNPL services, in particular, are favored by financially constrained consumers, who use them for nonessential purchases at rates significantly higher than more financially secure groups.

As credit continues to play a crucial role in consumers’ ability to make ends meet, findings from the PYMNTS report call attention to the growing financial divide in the U.S. The data suggests that consumers who are financially insecure are becoming increasingly dependent on credit, not only to purchase luxuries but to cover basic, everyday expenses. The heavy reliance on credit for necessities such as groceries and healthcare highlights how difficult it is for many to manage their finances in the current economic climate.