Americans going deeper in debt
Nearly half of consumers make minimum -- or no -- payments on credit card balances, a study finds.
By Loretta Kalb -- Bee Staff Writer Published 2:15 a.m. PST Sunday, March 9, 2003
Almost half of U.S. consumers are making only minimum payments -- or no payments at all -- on their credit cards, a new credit survey shows.
And a similarly large volume -- some 44 percent -- are continuing to take on debt because they don't have enough cash to pay ongoing expenses.
The dire outlook is part of the latest Cambridge Consumer Credit Index, a monthly gauge of consumer attitudes toward credit and a reflection of the nation's mounting individual debt.
On Friday, the Federal Reserve released its monthly survey of consumer credit for January, showing consumer debt rose sharply at an annualized rate of 9.1 percent, the fastest pace since November of 2001.
"What people don't know is that a large portion of the increase in debt was involuntary -- that 44 percent are going further into debt knowing in advance they won't be able to pay when the bills come in," said Jordan Goodman, spokesman for the index, an affiliate of the Cambridge Consumer Credit Counseling Corp. of Islandia, NY.
Pamela Christensen has seen the signs of faltering payments in her business, Financial Disciplines. The Roseville Certified Financial Planner attributes them in part to consumers' unwillingness to cut back on spending even when their incomes fall.
"In the Sacramento area we have a high lifestyle, and we don't adjust our lifestyle, even when one spouse loses a job or income goes down," she said.
And those who just don't have enough cash to pay their existing debt -- even at full employment -- are just one paycheck away from disaster.
The telephone survey, conducted over the last week and involving some 1,000 U.S. consumers, showed that 40 percent are making only minimum payments on their credit cards.
And another 6 percent have not been able to make any credit card payments -- up from 3 percent a year ago.
"I think that's pretty shocking, actually, that 6 percent made no payment whatsoever," Goodman said.
Goodman said he has nicknamed "the desperado syndrome" the tendency of consumers to take on debt even when they know they won't be able to pay it off.
"These are people who don't really have any choice," he added. "They don't want to go into debt. But they don't have income or ability to cover their basic needs any other way."
Christensen, who helps many middle-income consumers manage their money to eliminate debt, said she's seen what happens when consumers struggle to pay.
"What I'm finding is that when people come in, they will overpay one card and either not pay or pay a minimum on another card," she said. "They don't know that their (available) cash will not allow them to make a large payment."
The consequence, she said, is that they must resort to credit when a simple need arises, such as a car repair.
"What I do is have them pay minimum on every card except for the one with the lowest balance," she said. That allows them to achieve zero balances, one card at a time.
"I do that because human nature will not allow us to not see progress," she said, adding that when debt continues to pile up, beleaguered consumers often just give up.
Christensen also guides clients in understanding their cash flow and spending.
Donald Rehorn, spokesman for the Consumer Credit Counseling Service of the Sacramento Valley, also sees the credit struggles waged by consumers.
"When you are making only minimum payments you are spending a lot of money for interest," he said. "In essence, it becomes an interest-only payment.
"This is a relationship that goes on beyond most marriages, and the effect is that you're constantly reducing your income."
As income is squeezed, the temptation is to spend more with credit, he explained, further adding to the burden.
"That gets debilitating," Rehorn said, "so that people don't feel that they can ever catch up."
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