According to PYMNTS Intelligence research, 62% of Americans now live paycheck to paycheck, with each pay period providing just enough money to make it to the next. This lifestyle carries significant risk due to unexpected expenses. Needing to pay for a car repair, for example, could mean not having enough money for food in any given pay cycle.
Faced with this problem, paycheck-to-paycheck households have a much higher need for credit options than other, more financially secure families. They rely much more heavily on revolving credit, carrying unpaid balances from month to month. They also tend to have lower credit scores and higher outstanding balances than other groups. This unfortunate reality may force them to turn to high-risk, high-interest options like payday lenders to make ends meet. PYMNTS Intelligence has new data offering exclusive insights into this consumer segment and how it is leveraging credit to get by.
Paycheck-to-Paycheck Consumers Rely on Revolving Credit
Revolving credit — or carrying an unpaid balance from a previous month to the following one — can provide a convenient and flexible way to access funds. However, it also can incur significant interest charges over time. While many consumers admit to at least occasionally revolving their credit for various reasons, those living paycheck to paycheck do so with much more frequency. PYMNTS Intelligence data from August 2024 indicates that up to 59% of those living paycheck to paycheck revolve their credit, compared to only 23% of those not living paycheck to paycheck.
For context, PYMNTS Intelligence research from December 2023 revealed that financial distress is highly correlated with both revolving credit and reaching one’s credit limits. Paycheck-to-paycheck consumers also tended to have lower credit limits, making them more likely to exceed them. The resulting damage to their credit scores could lower their credit limits even further.
Paycheck-to-Paycheck Consumers Have Lower Credit Scores
Paycheck-to-paycheck households’ financial status becomes only more delicate when their revolving credit practices result in poorer credit scores. According to PYMNTS Intelligence data, paycheck-to-paycheck consumers’ credit scores averaged between 621 and 697, with the lower end belonging to that segment having issues paying their bills. In contrast, those who do not live paycheck to paycheck had an average credit score of 752. Lower credit scores arise from many factors related to the paycheck-to-paycheck plight, including a higher tendency to max out credit limits and to miss payments. The resulting impact on credit scores only compounds financial hardship by further reducing access to traditional credit. This domino effect can ultimately lead to more missed payments and even lower scores.
Faced with the challenge of obtaining credit, paycheck-to-paycheck consumers often resort to more onerous sources like payday lenders. These creditors are more willing to offer loans to consumers with poor credit histories — but at worse terms, with annual percentage rates (APRs) of up to 652%. One in five individuals who take out payday loans wind up defaulting on them, including more than half of those who obtain such loans online. The problem has become so bad that 12 states have banned payday loans outright. Although this is better for paycheck-to-paycheck households’ overall financial health, it leaves them with even fewer credit options.
Paycheck-to-Paycheck Consumers Carry Higher Credit Balances
PYMNTS Intelligence also found that because of their difficulties in paying off credit, paycheck-to-paycheck consumers carried higher outstanding credit balances than those not living paycheck to paycheck. The average outstanding balance of those living paycheck to paycheck who had difficulty paying bills was $7,244. By comparison, the average outstanding balance for non-paycheck-to-paycheck consumers was less than half this amount, at just $3,088. The average outstanding balance for paycheck-to-paycheck consumers who managed to pay their bills without difficulty fell in the middle, at $5,366.
Carrying these higher balances may force those living paycheck to paycheck to test the limits of their credit. According to PYMNTS Intelligence data, paycheck-to-paycheck consumers who struggle to pay their bills used an average of 69% of their credit limits. In stark contrast, consumers who do not live paycheck to paycheck used only 29% of their credit limits. Consumers who live paycheck to paycheck without trouble paying their bills also used significantly less of their credit limits than those who are struggling, at 39% on average.
The sharp difference in credit limit usage across these demographics stems from two factors. The first is that those who are not living paycheck to paycheck or having a hard time paying their bills tend to have higher credit limits, thus making it easier to use less of these limits proportionally than those living paycheck to paycheck and struggling financially.
The second factor is that paycheck-to-paycheck consumers who are having trouble making ends meet may be more likely to use credit rather than debit or cash for everyday purchases. This conclusion is supported by the fact that 60% of all credit card holders in the United States. are those living paycheck to paycheck. Because they are less likely to have funds on hand, credit becomes an essential way of paying for basic necessities. Both factors combined make it much more likely for paycheck-to-paycheck consumers to hit their credit limits, and to do so much more often.
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The Paycheck-to-Paycheck Report series contains a multitude of further insights into paycheck-to-paycheck households’ credit trends and habits. To stay up to date, subscribe to our newsletters and read our recent data reports chronicling the issues faced by paycheck-to-paycheck consumers.
