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Is grandma surviving on plastic?

January 18, 2013

| Money Rates Columnist

When the car breaks down, how do you pay the bill? For nearly half of middle-income individuals age 50 or older, the answer is to pull out their credit card.

That's according to a new survey from the advocacy group Demos and the AARP Public Policy Institute. The study finds the amount of credit card debt carried by less affluent older Americans is on the rise -- a trend the groups attribute to the difficult economic climate.

Seniors use credit cards as 'plastic safety net'

When Demos conducted a similar survey in 2008, it found Americans older than age 50 carried less credit card debt than their younger counterparts. But those days are gone.

In the 2012 survey, middle income seniors carried an average balance of $8,278 on their credit cards. Meanwhile, those younger than 50 carried an average credit card debt of $6,258.

According to the survey, many seniors are apparently using their credit cards as a "plastic safety net" and a stand-in for an emergency fund. While four in 10 report carrying credit card debt for the purchase of small non-essentials, many of the survey respondents say their credit card debt comes from emergency spending. The following percentages of respondents reported paying with plastic for these expenses:

  • Car repairs: 49 percent
  • Home repairs: 38 percent
  • Lay-off or loss of job: 23 percent

More than a third of those surveyed reported using credit cards to pay for basic living expenses, such as rent or mortgage payments, groceries and utilities. Somewhat disturbingly, nearly a quarter of those older than 50 went into debt to help a relative get out of debt or to otherwise help a family member.

All this debt doesn't come cheaply either. The survey found the average annual percentage rate (APR) for the 50+ crowd was 15.95 percent in 2012.

Breaking credit card dependency

In the press release, AARP CEO A. Barry Rand used the report as one example of why the government should work to strengthen Social Security, Medicaid and Medicare. But while government programs play an important role in many seniors' financial stability, they are unlikely to provide adequate funds for all retirement expenses.

The survey also points to the importance of maintaining an emergency fund, even in retirement. Having a reserve of cash in an easily accessible account, such as a savings account or money market account, is one way to avoid putting unexpected expenses on credit.

While savings account interest rates may seem to pay a pittance right now, the main purpose of an emergency fund is not to earn interest -- it is to prepare your finances for unforeseen costs. For many older Americans, failing to prepare this way is forcing them to spend their golden years paying off debt at nearly 16 percent APR.

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