Time for a change for America’s new middle class

It’s time we have a serious conversation on the challenges facing credit-constrained Americans. Downward pressure on wages and economic mobility means that more than half of all Americans now face a reality that puts financial success out of reach. Millions of families are now struggling to afford a home, pay for their kids to go to college, and create a financial safety net. They are the New Middle Class.

Forty percent of Americans cannot cover an unexpected expense of $400 or more, and more than half of Americans have credit scores below 700 – meaning they are considered non-prime. At Elevate’s Center for the New Middle Class, our research shows that this group is less likely to rely on banks, believing their financial institution does not have products designed for them. And, unlike their counterparts with prime credit scores, they do not believe they would be approved for a loan. 

{mosads}These challenges are still not fully understood by the public and policymakers alike. Many Americans are shocked to discover that more than 8 million households lack access to any form of banking, which is almost 9 percent of the population. Meanwhile, more than 18 percent are “underbanked” – meaning they have a checking account but turn to a non-traditional financial institution.

On Capitol Hill, productive conversations are beginning to happen to raise awareness about the realities non-prime Americans face. Recently, I was fortunate to participate alongside a panel of experts to highlight their research and start the discussion on how policymakers can make a difference in the lives of credit-constrained Americans. The panel included participants with different experiences and perspectives – including Aaron Klein from the Brookings Institution, Ernie Jolly, deputy chief of staff to Rep. Gregory Meeks (D-N.Y.), and Lisa Servon from the University of Pennsylvania.

The panelists stressed how the financial reality for non-prime Americans is fundamentally different – often through no fault of their own. For example, more than half of non-prime consumers struggle with income volatility – defined as swings of 25 percent or more in their income. These swings can be caused by a surprise accident, losing a job, or having a family medical emergency. These consumers are increasingly relying on online lenders and non-traditional financial institutions, as they are being left behind by traditional institutions. Unfortunately, for communities of color, the legacy of systemic racism is still evident in some parts of the financial system, leading to even greater hurdles.

It is clear there is a misperception of who the New Middle Class is. They are a varied group that often forms the backbone of our communities. They are the homeowners, college-educated, or gainfully employed Americans, who have fallen out of favor from mainstream credit options because they experienced an income shock or surprise expense. They are financially literate and know the immediate status of their financial situation. In fact, non-prime Americans are more aware of their day-to-day financial situation than prime consumers as they check their bank account balances 50 percent more often than prime counterparts.

When it comes to easing the burdens faced by these Americans, there is no one-size-fits-all solution. Proposed solutions included ensuring banks provide real-time payments, reconstituting the public safety net, modernizing banking regulation, and creating a responsible federal framework for innovative financial technology companies. We are unlikely to find an easy fix, but conversations like these are the crucial first steps. Understanding the challenges of the New Middle Class must be the foundation for creating workable policy solutions.

Jonathan Walker is the Executive Director of Elevate’s Center for the New Middle Class.