Spending more now could mean grim new year

Debt: Despite slow job growth, Americans are spending more for the holidays this year, polls find, which could mean trouble.

December 21, 2003|By Katherine Reynolds Lewis | Katherine Reynolds Lewis,NEWHOUSE NEWS SERVICE

After three years of slow job growth, with 9 million unemployed Americans still looking for work, you might expect this holiday season to be a bit subdued.

Instead, consumers are poised to strip the stores bare and add to record levels of debt, encouraged by a booming stock market and promising economic indicators.

"They're spending more because they feel good," said Gary Levin, a partner at Deloitte in Chicago. "The significant majority will be using credit cards."

The consulting firm, in a survey of 17,035 consumers, found that 67 percent expect to spend more or the same as last year. Excluding cars, sales will be 6 percent to 7 percent greater than during last year's holiday season, Deloitte projected.

People are expanding their shopping lists because of recent signs that the economy is improving, said Gloria Park Bartolone, a division vice president at Maritz Research in Fenton, Mo. One-quarter of respondents Maritz polled early this month had boosted their budgets since October, with 19 percent of those planning to take on more debt.

But if the promise of better times fails to deliver, the new year could be grim. As credit card bills come due next month, consumers unable to afford their holiday spending will become part of the annual cycle of buyer's remorse. In the worst cases, they will discover why bankruptcy filings are highest in the period from March to May.

"The trend of personal bankruptcies is going to continue to grow until new job growth picks up," Levin predicted.

Americans owe nearly $2 trillion in consumer debt, $728 billion of which is on credit cards and other revolving loans, according to the Federal Reserve Board. That's up from $1.5 trillion three years ago, before the stock market tumble and U.S. recession, and it doesn't include mortgage loans.

"Consumer debt is a huge problem and a trend that continues to grow," said Shelley Curran, a policy analyst at Consumers Union in San Francisco.

Instant credit is a particular danger for shoppers this time of year, she said. Many succumb to retail stores offering a 10 percent merchandise discount for signing up for an in-house card, often at a higher rate than bank-issued cards. The net result is a higher debt load and worse credit rating.

At Christmastime last year, Jeniece Vega owed $9,000 on eight different credit cards, largely because of dinners out and shopping sprees. But that didn't stop her from buying pricey presents for her friends and family - she simply used the two remaining credit cards that weren't maxed out.

"The thought of making a homemade present never crossed my mind," said Vega, 23, a college student in Orlando, Fla. "You want to make people happy; you want to give them a nice gift."

By February, her roommates were lying to creditors on the telephone, saying Vega had moved out. She couldn't even make the minimum payments on her credit cards anymore, so late fees added to her increasing mountain of debt. The stress made her feel "very fragile," prone to cry or explode in anger at any moment.

Vega's experience is not uncommon. The frenzy of the holidays often drives people to buy more than they planned or can afford, credit counselors say.

"If you emerge out of the holiday season and the balances on your credit cards are going up, that is a huge warning sign," said Steve Rhode, a money coach and president of Myvesta.org, based in Rockville, Md. "That says you are continuing to live a lifestyle that you simply cannot afford."

About three-quarters of Americans have spent more than anticipated during the holidays, according to a 2003 Gallup survey on holiday stress commissioned by the pharmaceutical company Sanofi-Synthelabo Inc., manufacturer of the sleep aid Ambien.

Many experts suggest putting yourself on a strict budget and consistently paying more than the minimum due, in order to get out of debt. Get educated about your finances; consumers often don't understand how credit works or how to read a credit card statement, said Doug Henderson, marketing coordinator at Credit Counselors in Richmond, Va.

Usually, an entirely new approach to life is needed, or people fall back into the same trap of overspending, Rhode said.

"Do you feel alone or empty inside and use money to purchase things to feel better?" he asked. "It's almost like recognizing that you have a problem with any substance. ... The more you can work with someone to examine how and why you spend money, without a doubt you are going to have a much better outcome."

For Vega, a new job at InCharge Institute, a credit counselor, turned her life around. She decided to apply the training she received to her own situation and got on a debt management program that will repay her creditors over five years.

Now, she eats at home and takes a lunch to work. She doesn't own a credit card. It is easier to skip new clothes at the mall because she's trying to save for a down payment on a house.

"Every time I pass by something that's cute, I think of what's in my bank account, and I try to envision how beautiful my house is going to be instead of a shirt that I'm going to wear for six months," Vega said.

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