Natural disasters like hurricanes, wildfires, earthquakes and the like cause billions of dollars in damage each year around the globe. The costs can be devastating to communities and individuals alike.
For people without insurance, the costs associated with a natural disaster can become financially ruinous, so it would stand to reason that people’s debt would increase and their credit scores would be negatively impacted in the months or even years after such a catastrophic event.
A recent study looking at the impact of 2005’s Hurricane Katrina on the credit scores of New Orleans residents may come as a bit of a shock, then, as it actually found the complete opposite to be true.
The study, “Household Finance After a Natural Disaster: The Case of Hurricane Katrina,” by Justin Hartley and Daniel Gallagher, looked at the impact of flooding on household finances.
“After Katrina, there is a sharp and immediate drop in total debt for the most flooded residents,” the authors write. “The reduction in total debt is driven almost exclusively by lower home loan debt.”
It appears that many homeowners used the payouts from flood insurance to pay off their mortgages rather than use the funds to make repairs or rebuild.
“Alternative explanations for the reduction in mortgage debt after Katrina either are too small in magnitude or do not fit the observed time pattern,” the authors wrote.
Credit Card Debt Didn’t Increase
In addition, the study found only modest evidence of residents using credit cards to pay for the unexpected costs after the flooding. There was only a temporary increase of about $500 or 15% in average credit card debt after Katrina for the most flooded group compared to the non-flooded group.
“There is evidence of a tightening overall credit market for flooded residents after Katrina,” the authors wrote. “However, differences in new credit card debt accumulation between individuals who are more and less likely to be credit constrained are not economically significant.”
Likewise, debt delinquency rates and credit scores also showed a modest, short-lived effect after Katrina.
We find that the most flooded residents have 90-day delinquency rates that are approximately 10 percent higher, relative to non-flooded residents, for one quarter following Katrina,” the authors wrote. “Credit scores for the most flooded residents are about 0.06 standard deviations lower for a two-year period following Katrina.”
The study did note that New Orleans households could have taken losses such as losing home equity, drawing down bank account savings, or tapping into retirement funds, none of which would have an impact on credit scores or impact credit card debt.
Also noted is the fact that the “institutional features of flood insurance provide a possible way for lenders to pressure borrowers to repay mortgages rather than to rebuild.”
What if it Happens to You?
If you’ve been impacted by a natural disaster recently, whether Hurricane Harvey, Hurricane Irma or any of the dozens of wildfires raging across the Western United States, your credit may be the very last thing on your mind. Still, as you work to piece your life back together, making smart financial decisions like continuing to pay bills on time can be critical to your long-term recovery.
If you do end up in significant debt due to a disaster, keep in mind there are things you can do to pay down your debt much faster than you may have imagined possible.
Just like repairing or rebuilding your home, it will take time and effort, and you may even need some help along the way, but it can be done. Two very popular approaches are the debt snowball and debt avalanche methods. It’s helpful to keep in mind that there’s no one right way to pay down your debt, so choose whatever method feels right for you.
[Editorial Disclosure: PayDownMyDebt.com is a service that provides people with tools to pay down their debts through automatic payments. The purpose of this article, however, is not to encourage users to purchase that service. This article is educational and journalistic in nature and aims to help people learn how to pay down their debt, whether they use our site, another, or go it alone.]