How Disasters Wreak Havoc on Financial Health and What We Can Do about It
As a clam and oyster fisherman in Wilmington, North Carolina, Jim Knight depends on the weather for a living. But when Hurricane Florence struck last year, he was out of work for months. Knight told WECT News that the relief money he recently received from the state government won’t cover his losses, but “it’s better than nothing.”
Natural disasters like Hurricane Florence lead to broad, and often substantial, negative impacts on financial health.
In a new report, we find that these impacts vary by the magnitude of the disaster and affected populations and that negative impacts extend across most measures of financial health, including credit scores, debt in collections, bankruptcy, credit card debt, and mortgage delinquency and foreclosures. In many instances, these effects are substantial.
How disasters impact credit scores
Credit scores are a composite indicator of financial health. Having a good credit score reduces the cost of borrowing money and can save residents hundreds or even thousands of dollars.
Residents hit by Hurricane Sandy experienced average credit score declines of 10 points four years after the disaster. The largest estimated effect on credit scores—a decrease of nearly 22 points four years out for people affected by medium-sized disasters—would indicate substantial deteriorations in access to and costs of credit (e.g., the ability to obtain credit cards or auto loans and on what terms).
In our data, the average credit score in the fourth year is 647—near the borderline between what is considered fair and poor—for people in our comparison group for medium-sized disasters. A 22-point decline can limit the ability to recover from natural disasters.
Smaller disasters are a big problem
As shown in the figure above, medium-sized disasters appear to lead to larger and more consistently negative effects on financial health than large disasters. Medium-sized disasters are those that cause less than $200 million in total damage and are large enough to trigger FEMA individual assistance but are less likely to receive special congressional appropriations for long-term recovery.
In our data, most of the people affected by medium-sized disasters were hit by the 2014 storms and flooding in Michigan, which hit urban areas in and around Detroit but did not receive additional funds for long-term recovery. Southeastern Michigan is a denser urban environment that has faced significant economic challenges, so this finding may not be generalizable. The effects of medium-sized disasters deserve additional study.
Strategies to better protect communities from financial hardship
Changes that span philanthropy, the private sector, and federal, state, and local government could strengthen recovery and resilience efforts, thereby lessening the negative effects of natural disasters on residents’ financial health. More strategies with greater detail are in our full report.
Consider long-term needs
Federal agencies should consider extending the period of temporary assistance and relaxing or extending application deadlines, particularly when households are confronted with so many options and other life concerns.
Help communities already struggling
Financial “mitigation” activities like physical property retrofits, hazard property insurance and health insurance, and other preventative measures should be encouraged and supported. The federal government could make it easier for people in low-income communities and communities of color—those often hit hardest by disasters—to apply and qualify for assistance.
Expand resources to victims of less-severe disasters
Government and philanthropy should expand resources made available to residents affected by less-severe disasters to improve both their short-term and long-term financial health and stability.
Incorporate financial health in recovery plans
The traditional model of disaster management focuses first on relief and response, followed by property rebuilding. Links to long-term community planning and household financial health are needed.
Consider new rules for credit scoring
Coordinating data between FEMA, the credit bureaus, and credit scoring companies and improving federal regulatory agency rules around how disaster-related hardships are identified on consumers’ credit reports could help stem the tide of declines in credit scores after disasters hit.
A home is inundated by floodwaters caused by Hurricane Florence near the Crabtree Swamp on September 26, 2018 in Conway, South Carolina. (Photo by Sean Rayford/Getty Images)