Holiday spending sure to speed the spread of parlous 'affluenza.'

0 Comments | Insight on the News, Dec 29, 1997 | by Anne Marriott

Millions of Americans hooked on credit cards are sliding into serious debt -- $400 billion nationwide. In quiet despair, many seek financial counseling or are filing for bankruptcy.

An addiction as crippling as drugs is sweeping across America. Bankers call it "affluenza" -- living high off credit cards without considering the costs of free spending.

Although many people have trouble meeting their minimum monthly-payment obligations, consumers will rack up more than $1.5 trillion in credit-card charges this year, a 50 percent increase over last year. Of that staggering total, $400 billion will be carried over in debts and subject to monthly finance charges that can amount to 22 percent of the balance.

Nearly every economic statistic from low unemployment to increasing wages, indicates that consumers should be able to repay their debts. Yet more and more Americans are sliding closer to financial disaster. Debt-plagued spenders are plunging into personal bankruptcy, which increased 28.6 percent to 1.1 million nationwide last year. Economists expect another 1.6 million people to file by the end of this year.

"This is a problem affecting 40 percent of American households; 40 million people are seriously burdened by credit-card debt," says Stephen Brobeck, executive director of the Consumer Federation of America. Still, the pushers keep pushing. More than a billion unsolicited offers of easy credit were crammed into the nation's mailboxes this year as banks and other issuers furiously compete for business.

Take the case of Julie, 24, who filed for bankruptcy protection last month when harassing phone calls from creditors and high monthly credit-card payments overwhelmed her. The mother of a 7-week-old child, she erased more than $20,000 in debt, most of which she says was run up by a former boyfriend who charged clothes and took cash advances on her account. Nevertheless, credit-card companies hanker for her business. She has received three offers for unsecured credit cards since she filed for bankruptcy

Jim, a 34-year-old military officer, has taken a different tack. His former wife's free-spending ways catapulted the family into near financial ruin before she walked out on him and their 8-year-old son last fall. "The stress of the money problems actually caused me to turn to alcohol," he confides, adding that his wife left him with $13,000 in debts and a shattered credit rating. Credit counseling has helped him maintain a schedule of payments, and he has quit drinking.

"No bank-card issuer wants a consumer to be over his head or in bankruptcy," says David Sandor, a spokesman at Visa U.S.A. "They want individuals who will have a relationship with them for a very long time." Issuers say that there has not been double-digit growth within the credit-card industry since 1995, when it grew 14.3 percent, according to the American Bankers Association in Washington. Last year's growth was 8.4 percent. Credit counselors tell consumers that no more than 20 percent of a person's take-home pay should go to pay credit-card and other nonessential debt. Yet many people are finding their monthly debts are in the 30 to 40 percent range, according to the Consumer Credit Counseling Service, or CCCS.

The problem, say counselors, is that consumers have access to high credit levels without understanding the dangers of spending to the limit. "People can usually handle their total financial situation, but they're not setting aside for savings," observes Joanne Kerstetter, president of CCCS. That can be more trouble, because they are forced to use the plastic to cover unexpected medical problems, job loss or divorce.

The Federal Reserve estimates that credit-card debt accounts for only 3.7 percent of all consumer debt, but few dispute that the easy credit pushes some people to the brink. The typical person filing for bankruptcy protection takes home less than $20,000 a year and has more than $17,000 in charges on credit cards. Some consumer groups say this is an obvious warning sign to the industry.

Bankers are quick to point out that they will write off only 1 percent of the $400 billion in outstanding debt this year. "There are some people who have overextended themselves," notes Keith Leggett, an economist at the American Bankers Association, "but over 96 percent of all consumers are using credit responsibly."

But almost anyone can wind up living on the edge, experts contend. "The blame is shared; no one is forcing consumers to accept cards and then run up large balances," says Brobeck of the Consumer Federation. "On the other hand, what has changed is the aggressiveness of credit marketing and credit extension."

Issuers dump losses on users who pay their bills on time -- credit-card households pay an average of about $400 extra to cover losses because of bankruptcies. And while institutions such as MBNA Bank, the world's second-largest card issuer with $39 billion in loans, tempt consumers with introductory interest rates of 5.9 percent and no annual fees -- an attractive combination for anyone -- tantalizingly low rates can skyrocket to 18 percent inside of six months.