From Bad to Worse: Natural Disasters and Financial Health

Abstract

Many families live on the financial edge, but a natural disaster can throw even better-situated families into financial turmoil. Comparing the financial outcomes of residents in areas hit by natural disasters with otherwise similar people in unaffected communities, this study finds that natural disasters lead to declines in credit scores and mortgage performance, increases in debt in collection, and impacts on credit card access and debt—effects that persist or even worsen over time. We also find that people who are more likely to be struggling financially before disasters strike are often the hardest hit by the disaster. Specifically, for people with low pre-disaster credit scores, as well as those who live in a community of color, the estimated declines in credit scores are particularly substantial. We find a similar pattern for mortgage delinquency and foreclosure. This pattern of results suggests that disasters may be not only harmful for affected residents on average, but may also have the effect of widening already existing inequalities. Our results also suggest that medium-sized disasters, which are less likely to receive long-term public recovery funding, lead to larger negative declines on credit scores than large disasters.