Natural Disasters Are Severely Detrimental to Residents’ Financial Health

The Urban Institute released a report, Insult to Injury: Natural Disasters and Residents’ Financial Health, showing natural disasters often widen existing inequalities and harm residents’ financial health. The negative effects of disasters persist or even grow over time resulting in significant negative financial outcomes. Individuals and communities more likely to be struggling financially before natural disasters tend to experience the worst financial outcomes afterward.

The Urban Institute used data from FEMA, a major credit bureau, and the Census Bureau’s American Community Survey to identify communities hit by natural disasters, measure individuals’ financial health, and understand the demographic characteristics of residents in impacted communities.

The researchers looked at effects across three categories of disasters: Hurricane Sandy (dealt with separately due to its uniquely large size and impact), large disasters, and medium disasters. Residents living in areas affected by medium-sized natural disasters, which are less likely to receive long-term public recovery funding, experienced a 9-point reduction in credit scores in the first year, on average, compared to those living in unaffected areas. By the fourth year, credit scores for residents in medium-sized disaster impact areas decreased by an average of 22 points. Residents impacted by large disasters experienced an average credit score decline of 2 points in the first year and 3 points by the fourth year, compared to residents in unaffected areas. Residents hit by Hurricane Sandy, a particularly large disaster, experienced a 7-point reduction in the average credit score in the first year and a 10-point reduction in credit score, on average, by the fourth year. Credit-score declines were more drastic for those who already had poor credit compared to residents who had fair or good credit prior to a disaster, especially in areas affected by medium-sized disasters. Credit score declines were also larger in low-income communities and communities of color impacted by medium-sized disasters.

Among residents in areas impacted by medium-sized disasters, there were pronounced increases in debt in collections and bankruptcies in the years following the disaster, but this was not observed for areas impacted by Hurricane Sandy or other large disasters. For residents living in areas affected by medium-sized disasters, the share of people with debt in collections was 10 percentage points higher than those not affected by disasters by the fourth year. The rate of bankruptcy doubled for residents in medium-disaster areas by the third year after a disaster compared to residents in non-affected areas. Mortgage delinquency and foreclosure rates increased in areas impacted by Hurricane Sandy and large disasters, especially for residents with poor credit scores prior to the disaster and areas with mostly people of color.

Urban’s findings suggest the need to address the mismatch between impacted residents’ financial needs and the timing, amount, and forms of assistance available after a natural disaster. Post-disaster programs and resources should cover long-term financial needs in addition to more immediate needs and should be available to communities and people hit by not just the worst disasters. Furthermore, a larger share of recovery resources should be aimed at communities that were struggling prior to a given disaster, namely lower-income communities and communities of color. The authors also suggest a need to change rules and guidance around how delinquencies resulting from disasters are identified on consumer credit reports and incorporated into credit scores.

Insult to Injury: Natural Disasters and Residents’ Financial Health,” is available at: