Credit card debt not so bad, unless it's got you buried

Staying Ahead

September 09, 1996|By Jane Bryant Quinn

CREDIT CARD delinquencies are creeping up, but for most of us there's not a lot to worry about. Consumer debt is cyclical. The vast majority of families manage it well.

Now and then, we charge up a storm, as happened last Christmas. Then we repent and throttle back. Recessions often follow shifts in consumer spending, but not always.

Some of the debt statistics today are actually looking pretty good. On-time payments have improved for auto loans and for revolving home-equity lines of credit.

Loan growth slowed in May for the third straight month, implying that the borrowing orgy has petered out.

A lot of the increase in credit card use isn't adding to debt at all. It's "convenience" shopping, by people who choose to put down plastic in place of cash. Some 36 percent of account holders now pay their monthly bill in full, up from 29 percent in 1991, according to surveys by RAM Research in Frederick, Md., which gathers industry statistics.

But, although the overall burden of debt isn't as bad as the headlines sound, a small but growing minority is indeed in crisis.

The banks are their enablers. Credit cards are so profitable that banks have been lending to practically anyone with a heartbeat and a mailbox -- former bankrupts; 20-card wonders; heavy debtors; octogenarians who never had cards before; even the poor, whose credit lines sometimes exceed their incomes.

In 1994 and 1995, lenders mailed some 5 billion credit card solicitations. That's 32 offers for every American between 18 and 65, says George Salem of the New York investment bank, Gerard Klauer Mattison & Co. Credit card debt declined between 1983 and 1992 for families earning more than $50,000, but more than doubled for those earning under $10,000.

Most of the marginal borrowers manage to pay. As a group they're a gold mine, because they're charged high interest rates. Sooner or later, however, a portion will fall behind, not because they're more careless than others but because they're more vulnerable to life's financial blows.

The bankers don't care; they price their cards to cover the risk. It's the card users who pay, all the way to bankruptcy court.

Surprisingly, high debt alone isn't a good predictor of bankruptcy, according to SMR Research, a financial services firm in Budd Lake, N.J. Given a chance, debtors can often dig their way out.

The principal cause of bankruptcy is debt combined with a sudden and unforeseen financial burden.

Some states have proportionately more bankruptcies than others, which SMR traces to differences in their laws. Here are some of the things that drive families over the edge:

An injury or serious illness with no health insurance. Nevada, with the fourth-highest bankruptcy rate in the United States, also has the largest portion of uninsured (nearly 23 percent of the population lacked coverage in 1992, compared with a U.S. average of 18 percent). Georgia, Mississippi and California also rank high. Hawaii, by contrast, with only 6 percent uninsured, has one of the lowest bankruptcy rates.

In America as a whole, the total number of uninsured has recently been growing by roughly 500,000 a year, every one of them bankruptcy bait if they're overwhelmed by medical bills.

An auto accident with insufficient insurance coverage. Bankruptcy may be the only way out, if you lose a horrific judgment in court. Seven states don't required drivers to carry liability insurance, SMR says. Four of them (Tennessee, Alabama, Mississippi and Virginia) are among the eight states with the highest bankruptcy rates.

Among cities, bankruptcy's gold, silver and bronze medals go to Memphis, Birmingham and Tuscaloosa.

Divorce. Lose your marriage, lose your money. Looking state-by-state and city-by-city, SMR found a clear correlation between spousal split-ups and bankruptcy rates. California and Oregon stand near the top of this problematical list.

Self-employed business failure. This calamity isn't state specific, but the toll will rise whenever the economy slows. Entrepreneurs have been known to borrow against every asset they have, including homes and credit cards.

If the business fails, bankruptcy may be inescapable.

Crises such as these might put anyone under. But you can stave off lesser problems simply by reducing debt.

George Kinder, a Cambridge, Mass., financial planner, offers this advice for lightening your load:

List the after-tax cost of each loan you have.

Pay the minimum on your low-rate debt and as much extra money as you can afford on the debts that are costing you the most.

As the balance declines, plow your interest savings into yet more debt reduction.

That's the highest return on investment you'll find in the economy today.

Pub Date: 9/09/96

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