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The pitfalls of plastic

The economy may be surging again, but the long downturn and persistent lack of job growth have left a trail of destruction for many consumers overwhelmed by credit card debt.
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The economy may be surging again, but the long downturn and persistent lack of job growth have left a trail of destruction for many consumers overwhelmed by credit card debt.

Personal bankruptcies are expected to hit a record of more than 1.6 million for 2003 and bank card delinquencies reached a record high of 4.09 percent in the third quarter — the dark side of a consumer spending spree fueled in part by historically low interest rates.

The Federal Reserve reported last week that outstanding consumer debt — excluding mortgages — rose past $2 trillion in November for the first time. That’s nearly $17,000 per household, with credit card debt alone at more than $6,200 per household.

The rising household debt causes some economists to worry that when interest rates rise — as they eventually must — millions more consumers will get caught in a debt squeeze, possibly posing a risk to the commercial banking system.

“It would appear that people are living on the edge,” said Paul Kasriel, economic research director for Northern Trust, who has been warning for years about growing household debt.

Other analysts say rising household debt poses little threat to the overall health of the economy, even as it captures a growing number of individuals in an insidious grip.

“There are two Americas,” said Jordan Goodman, a personal finance writer and spokesman for Cambridge Consumer Credit Counseling, a non-profit group that helps consumers reduce their debt burden.

Industry surveys show that 40 percent of consumers pay off their credit cards in full each month, he pointed out.

“They are doing great,” he said. “They get lots of frequent flyer miles. The other 60 percent to varying degrees are buried under or completely buried under, and getting in deeper. And you see the results.”

Gladys Gessert, 69, a former factory worker in Janesville, Wis., is one of those consumers who got buried in debt after a long spell of bad fortune. By early 1998 she had racked up credit card debt of more than $5,000, mostly through online purchases of computer programs that she hoped would help her make money, she said.

“I was just plain getting over my head,” she said. “I couldn’t seem to see my way clear. I knew something had to be done.”

She got on a debt-reduction program and managed to pay off her debt over five years, although on a meager Social Security income of $500 a month there were times when she ate nothing but eggs because that was all she could afford.

Allen Grommett, chief economist of Cambridge Consumer Credit, said most people who get into debt trouble have recently experienced a divorce, lost their job, or suffered serious medical problems that were not covered by insurance.

He refers to the “desperadoes,” mostly in lower-income brackets, who rely on costly credit card debt to try and bridge the gap as they make transitions in their lives.

“We are not likely to run into a serious overall problem,” he said. “The economy can certainly carry it at these levels, but for those people who are in those low-income categories who are using credit because of some desperate situation, this is a real problem for them.”

James Chessen, chief economist of the American Bankers Association, agreed that lower-income borrowers are more likely to get into trouble with personal debt. He pointed to recent figures showing an improvement in delinquency rates for loans on boats and recreational vehicles, which typically go to more affluent borrowers. Meanwhile delinquency rates have worsened on loans for mobile homes.

While the Fed has pushed down short-term interest rates, and mortgage rates fell last year to a 45-year low, credit card interest rates have not followed. The average credit card carries a 15 percent annual percentage rate, Goodman said, and consumers who fall behind or have less-than-perfect credit quickly see that jacked up to 20 or 25 percent plus penalty fees.

“If the Fed moves rates from 1 to 1.25 percent it’s not going to affect credit cards at all,” he said.

The problem is exacerbated by the easy availability of credit, with 5 billion credit card offers mailed out last year in the United States, including many to consumers who never would have qualified for credit 20 years ago, said Goodman, author of “Everyone’s Money Book.”

“Bankers call it the democratization of credit – giving people who can’t handle credit all the credit they can’t handle,” he said. And he pointed to a cultural shift to generations of Americans who have embraced debt as a way of life, compared with earlier generations whose experience in the Depression left them with an aversion to debt.

Chessen, of the bankers association, defended his industry’s practices, pointing out that even with the record-high delinquency rate nearly 96 percent of consumers are paying their bills on time as they promised to do.

“When it comes to who should get credit, you don’t want to bench the whole basketball team because one player was a jerk,” he said.

He said the rise in debt problems is a direct result of the long downturn that has cost the U.S. economy 2.3 million jobs over the past three years. And given the extremely sluggish job growth of the past five months, Chessen does not expect a reversal anytime soon.

“People use credit cards to cover the gap when they are out of work, and the longer they are unemployed the harder it becomes to manage until they miss a payment or two,” he said. “I don’t really see those rates going down very quickly even if we begin to see better jobs number because it takes some time for those people to begin to pay down their debt.”