Time to pay the piper America. Get ready:
usnews.com
Cover Story 3/19/01
Digging your way out of debt
Americans used the '90s boom to load up on credit.
Now the bill is coming due
By Paul J. Lim and Matthew Benjamin
American dreams these days are built on hope, hard work–and, often, a
mountain of debt. Without loans and credit cards, John and Gretchen
Gooby could not have gone to college or bought and furnished their
home in Phoenix.
Though the young couple had amassed $30,000 in student loans and
$15,000 in credit card debt by the end of the 1990s, they thought they
were handling it, even if making only the minimum monthly payments.
And they figured John's income would rise in the coming years, allowing
them to pay off debt.
John, a 36-year-old computer analyst, indeed doubled his annual salary,
to more than $50,000, between 1998 and 2000. But the couple's card
balances also kept pace. "We would get $100 worth of room on our
credit cards and say, OK, it's time to go out to dinner," says Gretchen,
a teacher who now stays home to raise their two boys. Then last year,
just weeks after John began a higher-paying job, his former employer
filed for bankruptcy and laid off its entire staff. Though they had dodged
that bullet, they still felt a cold fear. Lacking any savings and maxed out
on their plastic, the couple realized they had been living on the brink of
disaster and began credit counseling last year. "We were this close to
losing it all," John says.
Before throwing stones at the Goobys, consider the glass house you
may live in.
Americans today have taken on a record-breaking amount of debt.
Whether it's more than many people can handle will be one of the big
economic question marks of the next few years. Total household
debt–including credit cards, car loans, mortgages, and student
loans–topped 100 percent of disposable annual income late last year for
the first time. Two decades ago, the ratio stood at about two thirds.
Americans charged more than $1 trillion in purchases with their credit
cards alone last year, more than they spent in cash. The average
cardholder's outstanding balance is $4,400–up 123 percent in only a
decade, according to the Nilson Report, while personal income rose 72
percent. Meanwhile, the government recently reported that personal
savings have fallen to the lowest monthly level in history. And some
economists predict personal bankruptcies this year will break 1998's
record of 1.4 million.
This debt may have been manageable in the economic boom of the
1990s. Indeed, of the $675 billion outstanding in credit card balances at
the end of 2000, only $30 billion, or 4 percent, was delinquent. But the
economy is headed south now, corporate layoffs are rising, and many
consumers have turned negative on their future prospects. Also,
Congress is poised to pass a reform of the bankruptcy laws that will
make it harder to escape paying one's debts. "The consumer is
incredibly vulnerable right now," says Wynne Godley, an economist at
the Jerome Levy Economics Institute.
For one thing, the old standby safety nets–our houses and our stock
portfolios–don't seem quite as reassuring as they did just a few years
ago. During the decade's orgy of debt, many people took out home
equity loans to pay off their credit cards and finance other needs and
wants. That means the average homeowner now owes nearly half the
value of his or her home, compared with roughly 30 percent two decades
ago. Meanwhile, the stock market has tumbled, with the Nasdaq
composite index off nearly 60 percent from a year ago and the broader
market down more than 15 percent.
Spendthrifts. As the economy and stock market downshift abruptly
from fifth to first gear, it's painfully clear that Americans have neglected
to buckle up. "The greatest danger for people right now is they can't
predict whether they'll be laid off or have other events happen to them,"
says Teresa Sullivan, coauthor of The Fragile Middle Class: Americans
in Debt.
Thus far, unemployment remains near a historic low. But if it returns to
the level of the early 1990s, those Americans saddled with debt would
be in the most trouble. Yet even for them, it's still not too late to step
back from the abyss. Recognizing your problem is the first step. Coming
up with a workable plan to pay down debt is the second. The process
can be painful, though: Reversing debt accumulated in months can take
years, or longer (box, Page 60).
How did America get into this mess, spending away our future earnings?
Perhaps it has something to do with our eternal sense of optimism that
leads us to believe we will have a better life than our parents. "We are a
nation of overspenders, a nation that is into instant-gratification highs,"
says Olivia Mellan, a Washington, D.C., psychotherapist who
specializes in money issues.
Tim Horrigan sure believed in the better future–until last year, when after
more than a decade of surviving on credit, he was forced to file for
bankruptcy. In 1988, amid flush economic times, he was earning just
$100 a week polling and distributing fliers in New England for Michael
Dukakis's presidential campaign. To make ends meet, the New
Hampshire resident, now 44, used Discover and American Express
cards to pay living expenses. "I figured I'd be getting a better job in
Washington soon to pay it off," he says. Voters had other plans,
however, and Horrigan dragged his $1,000 card balances on to his next
job as a computer technician.
Hard times. Horrigan lost that position in a 1991 downsizing, and by
1997 he had accumulated $35,000 in debt spread over 12 credit cards,
with interest rates as high as 25 percent. Despite a yearly income of no
more than $30,000, Horrigan generally kept up with his bills until last
year, when he missed one payment to American Express, which
demanded $12,500 within four days. "I finally realized my debt load was
unmanageable on my income," he says.
Those who think they are controlling their debt should consider what can
easily happen at the tail end of an economic boom. In 1988, Jeanna
Smith was earning about $16,000 a year at a nurse-referral service in
Cincinnati. That was enough to make ends meet, barely, despite having
$7,000 in student loans and $5,000 in credit card balances. But then
she lost her job and, along with it, her health insurance. And $2,000 in
healthcare bills piled up, for tests on what turned out to be a benign
lump in her breast. Smith, now 44 and a third-grade teacher, is debt free
but still sees a credit counselor.
What troubles experts is that debt loads are often the heaviest when
people are the youngest and just starting out on their careers and
personal lives. A recent survey by the Strong Investments mutual-fund
group found that 56 percent said debt has hindered their ability to save
for retirement. Instead of putting money away now when it has the
greatest chance of rising in value over time, young people are forced to
use their spare cash to pay off student loans, make car payments, or
pay down credit card bills.
Lisa Nickel, 28, is living now with the insecurity born of debt she took on
in college. When she graduated from the University of South Florida in
1997, she left with more than a master's in library sciences–she also
had close to $30,000 in loans. She pays $300 each month for the loans,
as well as about $200 on a car. That leaves her with just enough to put
money away for retirement but little extra."I won't feel totally secure until
[the debt] is paid off," she says.
Nickel's lack of savings is a problem that many people suffer from.
"You'd think that just like any dumb animal in nature, we would store up
food in the spring and summer so that we would have something for the
winter," says Greg Schultz, a financial planner in Walnut Creek, Calif.
"But we don't seem to be that smart."
Part of the problem with our debt obsession is that, for some, it is close
to an addiction. Managing debt isn't like controlling most other
compulsions. If you're a drinker, you can keep alcohol out of your house.
If you're a gambler, you can avoid weekend trips to Vegas. But if you're
a chronic debtor, you don't have to do anything to fall over the precipice
because the precipice often comes to you, especially during economic
downturns. "Our money behavior is actually a big expression of who we
are inside," notes Tahira Hira, professor of human development and
family studies at Iowa State University. "It shows how much we are
willing to accept reality and how much we want to be something that we
are not."
Hard sell. The Goobys knew full well they couldn't afford a vacation
home. But two years ago, just as they were starting to pay down that
debt, they "succumbed to a high-pressure sales pitch" and bought into a
time share–and a lifestyle–in Scottsdale, Ariz. "We bought it on a
whim," concedes John, who was seduced by the promise of a $75 gift
certificate to Home Depot for attending the sales seminar. The clincher
came when the sales firm allowed them to charge part of the down
payment. To this day, the couple has never used the $8,000 vacation
suite, which they are trying to sell.
Of course, the credit card issuers, the auto lease firms, and the
subprime lenders who peddle mortgages for 105 percent of a home's
value, understand the American psyche all too well. Last year, though
the average cardholder already carries nine cards in his or her wallet,
card companies mailed out an estimated 3.3 billion credit card
solicitations. That's about 30 per household. Their goal: snag a greater
share of the $3 trillion in credit lines already extended, or $30,000 a
household.
"Credit card issuers are brazenly lobbying for new bankruptcy
restrictions at the same time their aggressive marketing and lending
practices are pushing many families closer to the financial brink," says
Travis Plunkett, legislative director for the Consumer Federation of
America. Counters Catherine Pulley of the American Bankers
Association: "All this bill says is, if you have the ability to pay back
some of your debt, you do. If you don't, you don't."
The card issuers pepper their come-ons with images of a better life.
"Visa, it's everywhere you want to be." "There's always something more
to discover," with your Discover Card. Or American Express's classic
"Membership has its privileges." And they seem to know no limit:
Shortly after Horrigan filed for bankruptcy last year, he began to receive
a slew of credit card offers in the mail.
Consumers can control their credit, says Julie Malveaux, spokesperson
for the bankers association. "Just because offers may be coming in the
mail, one should not accept every single one of them."
But is pushing credit anything new? Contrary to popular belief, debt is
not something baby boomers discovered. Starting in the 19th century,
"respectable" members of the community bought defining symbols of
the middle class such as pianos, sewing machines, and cars on
installment plans. In a young country where titles meant little,
"Americans pretty much defined themselves by what they had and
owned," says Lendol Calder, author of Financing the American Dream:
A Cultural History of Consumer Credit.
Yet back then, one had to physically go into that furniture shop, that
sewing machine company, or the piano maker to obtain an installment
loan. If you then defaulted on that agreement, those merchants–often
neighbors or members of your church–knew exactly who you were.
Today, owing to the proliferation and democratization of credit, not to
mention the Internet, many of us can buy nearly anything on credit in
the blink of an eye, even movie tickets and groceries. And if a payment
is missed, none of our neighbors need to know. Even if they find out,
there is little shame in being a debtor in this era of easy public
repentance and bare-all TV shows like Jerry Springer. "Ten years ago,
when I would put on seminars on debt management, people would come
up to me afterwards and tell me their problems privately," says Michael
Jones, director of education for Consumer Credit Counseling Service's
Fresno, Calif., office. "Today, whenever I mention an example of a
person who is in debt during my talk, I continually have people laughing,
saying, 'That's nothing, I've got $20,000 or $30,000.' There's no sense of
embarrassment."
Indeed, the opposite sentiment seems to prevail. "There's just
something about pulling out that credit card," says William Lister, 37, of
Emporia, Kan. "And a total denial of what's coming." Over the past three
years, Lister charged more than $10,000, much of it for compact disks.
The impulses aren't new. It's the means for acting on them, says Iowa
State's Hira. Fifty years ago, people "couldn't walk into a lending
institution and say, I need $100 to go out to dinner or to buy that 50th
pair of shoes." That all changed in September 1958, when Bank of
America mailed out its first batch of BankAmericards (now Visa) to
residents of Fresno. America would never be the same. By 1980, 56
percent of American adults were carrying around at least one credit card
in their wallet; by 2000, the figure had surged to 76 percent. This year,
cardholders are expected to carry outstanding credit balances of $718
billion.
Seeking help. Ray and Anette Haven of Palmdale, Calif., have done
their part. The couple, who earn about $80,000 a year, have $53,000 of
debt not including mortgages. Bewildered by the amount, the
40-something couple realized they needed help. So they spoke with
counselors at Myvesta.org, a nonprofit financial adviser in Rockville, Md.,
which helped them determine exactly why they went into debt: their
family.
The Havens have given more than $20,000 to Ray's homeless brother for
room and board over the past three years. And over the years, their adult
children have lived with them off and on but have not contributed to
expenses. The Havens now have a plan to pay their debts, which
includes asking the kids to chip in. "This is my responsibility," says
Ray, who is determined not to join the legions of Americans who have
filed for bankruptcy in recent years. "Bankruptcy is a financial solution
for an emotional problem," says Steve Rhode, who cofounded
Myvesta.org after he filed for bankruptcy in 1990, with $25,000 in credit
card debt. And debt, he adds, "is never about money."
That's the message at a meeting in Catonsville, Md., a quiet Baltimore
suburb, where on a recent drizzly winter night 15 people gathered in the
rec room of the Bishop Cummins Reformed Episcopal Church, seeking
salvation of a different kind. A well-dressed, middle-aged man stood up
and said: "Hi, I'm Tom, compulsive debtor and overspender." Replied the
group cheerfully, "Hi, Tom."
It may seem like a perfunctory exchange between support-group
members. But for the participants of this 12-step Debtors Anonymous
program, it provides solace from the feelings of isolation that arise from
overdue bills, calls from collection agencies, and other sad trappings of
debt.
Debtors Anonymous meetings–there are 424 each week around the
nation–do not focus on how members got into debt. Organizations like
the National Foundation for Credit Counseling do that. Instead, the 15
members in attendance are here to talk about why they got into debt and
how they are dealing with it now. "People aren't aware of the
consequences of debt," says Robert Manning, author of Credit Card
Nation. "The real issue is, where are they supposed to be informed?"
Perhaps debtors will have an epiphany like the Goobys' before they end
up at the door of Debtors Anonymous. |
