TACKLING DEBT FROM ALL SIDES
TACKLING DEBT FROM ALL SIDES
TACKLING DEBT FROM ALL SIDES
For most workers, debt is a necessary tool to make ends meet. Wages fail to keep pace with the rising cost of living and create persistent cash flow shortfalls that leave workers vulnerable to predatory debt products. These products trap workers in debt cycles that intensify their financial strain and harm their long-term financial health. Escaping the cycle is much more challenging than entering it, and many workers need support to navigate product alternatives, access cash flow to pay existing debt, and eliminate predatory accounts.
Neighborhood Trust has a deep understanding of the marketplace of short-term cash flow products and services. Our Financial Coaches can identify predatory products in our clients’ balance sheets and help swap them for safer, more affordable options to eliminate debt and build savings over the long term.
Spending on interest and fees is up: In 2022, U.S. consumers spent $347 billion on interest and fees on non-mortgage financial services, up 14% from 2021.
Workers of color shoulder a disproportionate burden: Black and Latino households spent the highest proportions of their income (7% and 5% respectively) on credit card interest and fees, compared to 3% for white households. Workers of color also disproportionately spent on higher-cost alternative credit products such as payday loans.
For most workers, debt is a necessary tool to make ends meet. Wages fail to keep pace with the rising cost of living and create persistent cash flow shortfalls that leave workers vulnerable to predatory debt products. These products trap workers in debt cycles that intensify their financial strain and harm their long-term financial health. Escaping the cycle is much more challenging than entering it, and many workers need support to navigate product alternatives, access cash flow to pay existing debt, and eliminate predatory accounts.
Neighborhood Trust has a deep understanding of the marketplace of short-term cash flow products and services. Our Financial Coaches can identify predatory products in our clients’ balance sheets and help swap them for safer, more affordable options to eliminate debt and build savings over the long term.
Spending on interest and fees is up: In 2022, U.S. consumers spent $347 billion on interest and fees on non-mortgage financial services, up 14% from 2021.
Workers of color shoulder a disproportionate burden: Black and Latino households spent the highest proportions of their income (7% and 5% respectively) on credit card interest and fees, compared to 3% for white households. Workers of color also disproportionately spent on higher-cost alternative credit products such as payday loans.
MARKETPLACE SNAPSHOT
MARKETPLACE SNAPSHOT
A LOOK AT HOW CASH FLOW SMOOTHING PRODUCTS CAN HARM LOW-INCOME WORKERS
A LOOK AT HOW CASH FLOW SMOOTHING PRODUCTS CAN HARM LOW-INCOME WORKERS
Too often, products promoted as helpful to consumers can cause long-term financial harm. Exploitative financial services target low-income workers who are navigating tight budget margins by promoting speedy and convenient access to cash. Many incentivize over-spending and use features designed to keep workers dependent on the product over the long term.
Retail store credit cards, cash advance apps, and Buy Now, Pay Later (BNPL) apps are some of the highest-risk financial products targeting workers who need help covering monthly expenses. Below, Neighborhood Trust shares data on the scale and design of three products that cause burdensome debt for our clients.
RETAIL STORE CREDIT CARDS: Many credit cards share features that risk having outsized harm on low-income consumers. But a particular subset of credit cards pose an even greater risk to workers’ financial health: retail store cards. The most harmful features of these cards include:
Charging above market-rate APRs
Offering rewards that are quietly and immediately offset by interest charges for borrowers who don’t pay in full
Enabling spending only in one place, and typically offering no opportunity for borrowers to increase their credit limit—a critical path to strengthening credit over time
Targeting subprime borrowers with aggressive point-of-sale (POS) marketing that offers enticing discounts at the register, masking the true cost of borrowing for a given retail purchase
Harmful features paired with POS marketing can encourage high spending and long payoff periods, setting up low-income consumers to accumulate unaffordable, cyclical balances as interest rapidly accrues.
CREDIT CARDS BY THE NUMBERS
Store credit cards charge an average APR of 30.24%, much higher than the average of 21.19% for general purpose cards.
37% of current or prior store card holders regretted getting them. Younger consumers (age 41 and below) were 2x more likely to regret having a store card than older consumers.
RETAIL STORE CREDIT CARDS: Many credit cards share features that risk having outsized harm on low-income consumers. But a particular subset of credit cards pose an even greater risk to workers’ financial health: retail store cards. The most harmful features of these cards include:
Charging above market-rate APRs
Offering rewards that are quietly and immediately offset by interest charges for borrowers who don’t pay in full
Enabling spending only in one place, and typically offering no opportunity for borrowers to increase their credit limit—a critical path to strengthening credit over time
Targeting subprime borrowers with aggressive point-of-sale (POS) marketing that offers enticing discounts at the register, masking the true cost of borrowing for a given retail purchase
Harmful features paired with POS marketing can encourage high spending and long payoff periods, setting up low-income consumers to accumulate unaffordable, cyclical balances as interest rapidly accrues.
CREDIT CARDS BY THE NUMBERS
Store credit cards charge an average APR of 30.24%, much higher than the average of 21.19% for general purpose cards.
37% of current or prior store card holders regretted getting them. Younger consumers (age 41 and below) were 2x more likely to regret having a store card than older consumers.
CASH ADVANCE APPS: A newer alternative to payday loans, direct-to-consumer cash advance apps (also referred to as earned wage access) allow users to borrow in between their paychecks and repay on payday. While cash advance apps are not inherently predatory, many have harmful features and pose a high-risk to consumers. When used by low-income workers to postpone a persistent budget shortfall, they can increase debt and financial fragility. Additionally, until recent action from the CFPB, they have not been regulated as a form of credit, leaving room for companies to exploit marketing and disclosure loopholes. Examples of harmful cash advance app features include:
A payback structure that relies on balloon payments on payday that can potentially siphon off 50% or more of a paycheck. This balloon payment can lead to a cash flow shortage and the need to borrow again, sparking a debt cycle.
The ability for workers to secure multiple loans during the same pay period can lead to them being overextended on payday, resulting in added costs from overdraft fees.
Marketing that centers on the interest-free nature of these apps, but that obscures monthly subscription fees and suggested tips that translate to average APRs of over 300%. (This feature will hopefully be addressed by the new proposed CFPB interpretive rule).
CASH ADVANCE APPS BY THE NUMBERS
75% of users borrow again on the same day or the day after making a repayment
Users borrow an average of 36x per year, which equates to 1.45x per pay period for someone who gets paid twice monthly
CASH ADVANCE APPS: A newer alternative to payday loans, direct-to-consumer cash advance apps (also referred to as earned wage access) allow users to borrow in between their paychecks and repay on payday. While cash advance apps are not inherently predatory, many have harmful features and pose a high-risk to consumers. When used by low-income workers to postpone a persistent budget shortfall, they can increase debt and financial fragility. Additionally, until recent action from the CFPB, they have not been regulated as a form of credit, leaving room for companies to exploit marketing and disclosure loopholes. Examples of harmful cash advance app features include:
A payback structure that relies on balloon payments on payday that can potentially siphon off 50% or more of a paycheck. This balloon payment can lead to a cash flow shortage and the need to borrow again, sparking a debt cycle.
The ability for workers to secure multiple loans during the same pay period can lead to them being overextended on payday, resulting in added costs from overdraft fees.
Marketing that centers on the interest-free nature of these apps, but that obscures monthly subscription fees and suggested tips that translate to average APRs of over 300%. (This feature will hopefully be addressed by the new proposed CFPB interpretive rule).
CASH ADVANCE APPS BY THE NUMBERS
75% of users borrow again on the same day or the day after making a repayment
Users borrow an average of 36x per year, which equates to 1.45x per pay period for someone who gets paid twice monthly
BUY NOW, PAY LATER: Buy Now, Pay Later (BNPL) products allow consumers to pay off online retail purchases in interest-free, weekly or bi-weekly installments. The industry is growing rapidly: originations grew 970% from 2019 to 2021. Recently, the Consumer Financial Protection Bureau issued several areas of concern related to features of BNPL products and the way they’re marketed to consumers:
High fees for missed payments harm consumers with limited cash flow, and often come as a surprise as most products do not have clear disclosures on the true cost to borrow.
Autopay is often required, and repayment by credit card is accepted, allowing borrowers to cover one debt with another debt.
BNPL products use deceptive design, such as displaying an enticingly low installment payment, to exploit behavioral biases and nudge users to increase the amount and frequency of their spending.
BUY NOW, PAY LATER BY THE NUMBERS
14% of all households report using at least one BNPL product
BNPL use is most prevalent among consumers with annual income between $20K and $50K
26% of Black consumers and 24% of Hispanic consumers use BNPL products, compared to 16% of white consumers
BNPL shoppers have 85% higher average online order value compared to shoppers using other payment methods
BUY NOW, PAY LATER: Buy Now, Pay Later (BNPL) products allow consumers to pay off online retail purchases in interest-free, weekly or bi-weekly installments. The industry is growing rapidly: originations grew 970% from 2019 to 2021. Recently, the Consumer Financial Protection Bureau issued several areas of concern related to features of BNPL products and the way they’re marketed to consumers:
High fees for missed payments harm consumers with limited cash flow, and often come as a surprise as most products do not have clear disclosures on the true cost to borrow.
Autopay is often required, and repayment by credit card is accepted, allowing borrowers to cover one debt with another debt.
BNPL products use deceptive design, such as displaying an enticingly low installment payment, to exploit behavioral biases and nudge users to increase the amount and frequency of their spending.
BUY NOW, PAY LATER BY THE NUMBERS
14% of all households report using at least one BNPL product
BNPL use is most prevalent among consumers with annual income between $20K and $50K
26% of Black consumers and 24% of Hispanic consumers use BNPL products, compared to 16% of white consumers
BNPL shoppers have 85% higher average online order value compared to shoppers using other payment methods
OUR APPROACH TO TACKLING CYCLICAL DEBT
OUR APPROACH TO TACKLING CYCLICAL DEBT
Often, Neighborhood Trust clients come to us with debt from multiple sources. For example, a client may be carrying a balance on a store credit card and have multiple cash advance apps pulling from their paycheck. As a result, the client faces an ongoing cash shortfall, hundreds of dollars paid each month in interest and fees, and little to no cash going toward savings.
Step 1: Cash and Balance Sheet Optimization. We identify and analyze the drivers of debt and build an action plan for debt relief.
Step 2: Attack Debt from All Sides. We use five levers to make financial products work better for our clients.
Step 3: Workers Hold Onto More Money and Build Savings. We help clients transition from debt to savings and meet their personal financial goals.
Step 1: Cash and Balance Sheet Optimization. We identify and analyze the drivers of debt and build an action plan for debt relief.
Step 2: Attack Debt from All Sides. We use five levers to make financial products work better for our clients.
Step 3: Workers Hold Onto More Money and Build Savings. We help clients transition from debt to savings and meet their personal financial goals.
INTERVENTIONS IN ACTION
INTERVENTIONS IN ACTION
CLARIFY/EMPOWER
We provide practical information about optimizing cash flow and credit profiles. Clients understand and avoid harmful financial products such as BNPL products, point-of-sale credit cards, and debt reduction scams.
PRODUCT ENROLLMENT
We help workers swap out expensive and harmful financial products for inclusive, affordable options that reduce debt. Clients begin using products such as consumer-friendly, no-fee bank accounts, and zero- and low-interest loans at credit unions and CDFIs.
NEGOTIATION
We negotiate with creditors and collectors and train clients to successfully do so on their own. Clients eliminate, restructure, and refinance debts and may receive referrals for filing bankruptcy and to nonprofit debt management companies.
ADVOCACY
We teach clients their consumer rights and how to assert themselves to challenge financial service exploitation. Clients regain power in cases of credit report data disputes, identity theft, and illegal debt collection practices.
NAVIGATION
We increase access to worker-focused public and private financial services, programs, and benefits. Workers utilize benefits such as free tax prep, ITIN enrollment, student loan discharge or balance reduction, food stamps and more.
CLARIFY/EMPOWER
We provide practical information about optimizing cash flow and credit profiles. Clients understand and avoid harmful financial products such as BNPL products, point-of-sale credit cards, and debt reduction scams.
PRODUCT ENROLLMENT
We help workers swap out expensive and harmful financial products for inclusive, affordable options that reduce debt. Clients begin using products such as consumer-friendly, no-fee bank accounts, and zero- and low-interest loans at credit unions and CDFIs.
NEGOTIATION
We negotiate with creditors and collectors and train clients to successfully do so on their own. Clients eliminate, restructure, and refinance debts and may receive referrals for filing bankruptcy and to nonprofit debt management companies.
ADVOCACY
We teach clients their consumer rights and how to assert themselves to challenge financial service exploitation. Clients regain power in cases of credit report data disputes, identity theft, and illegal debt collection practices.
NAVIGATION
We increase access to worker-focused public and private financial services, programs, and benefits. Workers utilize benefits such as free tax prep, ITIN enrollment, student loan discharge or balance reduction, food stamps and more.
OUR WORK IN ACTION
OUR WORK IN ACTION
Whitney’s Story: Financial Recovery and Overcoming Buy Now, Pay Later Apps
Whitney’s Story: Financial Recovery and Overcoming Buy Now, Pay Later Apps
BACKGROUND
Whitney came to Neighborhood Trust seeking help to escape a debt cycle where she was using eight Buy Now, Pay Later (BNPL) apps and multiple digital cash advance apps to meet short-term cash flow needs. These products were pulling up to $800 from her paycheck, leaving Whitney without funds to cover basic living expenses or her credit card payments.
INTERVENTIONS
Neighborhood Trust’s Financial Coach, Dametria, applied targeted interventions to assist Whitney with tackling her debt:
IMPACT
Within one year of working with Neighborhood Trust, Whitney recouped $500-$800 per month of her income by paying down seven of her eight BNPL balances and eliminating cash advance apps with exploitative features. WHITNEY HAS REDUCED HER DEBT BY $8,133 AND INCREASED HER CREDIT SCORE BY 64 POINTS.
BACKGROUND
Whitney came to Neighborhood Trust seeking help to escape a debt cycle where she was using eight Buy Now, Pay Later (BNPL) apps and multiple digital cash advance apps to meet short-term cash flow needs. These products were pulling up to $800 from her paycheck, leaving Whitney without funds to cover basic living expenses or her credit card payments.
INTERVENTIONS
Neighborhood Trust’s Financial Coach, Dametria, applied targeted interventions to assist Whitney with tackling her debt:
IMPACT
Within one year of working with Neighborhood Trust, Whitney recouped $500-$800 per month of her income by paying down seven of her eight BNPL balances and eliminating cash advance apps with exploitative features. WHITNEY HAS REDUCED HER DEBT BY $8,133 AND INCREASED HER CREDIT SCORE BY 64 POINTS.
Luz’s Story: Overcoming Debt to Secure Her Future
Luz’s Story: Overcoming Debt to Secure Her Future
BACKGROUND
Luz came to Neighborhood Trust carrying more than $30,000 in credit card debt, and paying more than $1,000 in monthly minimum payments, with over 60% of those payments going toward interest and fees. Luz was seeking to eliminate this debt, and invest in her future by establishing an emergency fund, putting aside money for retirement, and saving for a down payment on a home in Puerto Rico.
INTERVENTIONS
To address these financial goals, Neighborhood Trust’s Financial Coach, Elise, developed a comprehensive long-term plan for Luz.
IMPACT
The debt consolidation loan significantly reduced Luz’s monthly payments to high interest cards, opening room in her budget to pay beyond the minimum on her remaining debt and establish savings. LUZ HAS ALREADY SET ASIDE NEARLY $1,000 FOR EMERGENCIES, GIVING HER A STRONG START ON HER PATH FROM DEBT TO SAVINGS AND HER DREAM OF OWNING A HOUSE IN PUERTO RICO.
Without
Neighborhood Trust
With
Neighborhood Trust
BACKGROUND
Luz came to Neighborhood Trust carrying more than $30,000 in credit card debt, and paying more than $1,000 in monthly minimum payments, with over 60% of those payments going toward interest and fees. Luz was seeking to eliminate this debt, and invest in her future by establishing an emergency fund, putting aside money for retirement, and saving for a down payment on a home in Puerto Rico.
INTERVENTIONS
To address these financial goals, Neighborhood Trust’s Financial Coach, Elise, developed a comprehensive long-term plan for Luz.
IMPACT
The debt consolidation loan significantly reduced Luz’s monthly payments to high interest cards, opening room in her budget to pay beyond the minimum on her remaining debt and establish savings. LUZ HAS ALREADY SET ASIDE NEARLY $1,000 FOR EMERGENCIES, GIVING HER A STRONG START ON HER PATH FROM DEBT TO SAVINGS AND HER DREAM OF OWNING A HOUSE IN PUERTO RICO.
Without
Neighborhood Trust
With
Neighborhood Trust
BACKGROUND
Luz came to Neighborhood Trust carrying more than $30,000 in credit card debt, and paying more than $1,000 in monthly minimum payments, with over 60% of those payments going toward interest and fees. Luz was seeking to eliminate this debt, and invest in her future by establishing an emergency fund, putting aside money for retirement, and saving for a down payment on a home in Puerto Rico.
INTERVENTIONS
To address these financial goals, Neighborhood Trust’s Financial Coach, Elise, developed a comprehensive long-term plan for Luz.
IMPACT
The debt consolidation loan significantly reduced Luz’s monthly payments to high interest cards, opening room in her budget to pay beyond the minimum on her remaining debt and establish savings. LUZ HAS ALREADY SET ASIDE NEARLY $1,000 FOR EMERGENCIES, GIVING HER A STRONG START ON HER PATH FROM DEBT TO SAVINGS AND HER DREAM OF OWNING A HOUSE IN PUERTO RICO.
Without
Neighborhood Trust
With
Neighborhood Trust
WHO WE ARE
WHO WE ARE
Neighborhood Trust is a national financial services innovator dedicated to building worker financial security. Our solutions, TrustPlus and Pathways to Financial Empowerment, provide comprehensive support to workers.
TrustPlus is our worker financial health benefit that is embedded nationwide within employers, financial institutions, and FinTechs. Pathways to Financial Empowerment integrates our trusted, action-oriented financial coaching model into credit unions, in partnership with the national credit union network, Inclusiv.
These solutions help workers eliminate and avoid debt, enabling them to build savings and escape the vicious cycle of living paycheck to paycheck. For over 25 years, we have worked closely with workers as trusted human guides, helping them achieve the financial security they deserve.
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