Disturbing. _____________ U.S. Consumer Debt Grows at Alarming Rate Debt Burden Will Intensify When Interest Rates Rise By William Branigin Washington Post Staff Writer Monday, January 12, 2004; 12:46 PM Feeling besieged by all those post-holiday credit card bills? Struggling to dig out from an avalanche of debt? You are not alone. According to the latest figures from the Federal Reserve, America's consumer debt has topped $2 trillion for the first time, continuing what debt experts view as an alarming surge in recent years. To some, the nation's consumer debt, which dwarfs that of any other country, represents the kind of "bubble" that the stock market grew into during the 1990s. "It's a huge problem," warns Howard S. Dvorkin, president and founder of Consolidated Credit Counseling Services Inc., a nonprofit debt-management organization. "You cannot be the wealthiest country in the world and have all your countrymen be up to their neck in debt." Robert D. Manning, a leading expert on the credit card industry, sees families as likely to come under even greater stress as interest rates -- currently near historic lows -- inevitably rise. "That's one of the trends that's really going to kill the American consumer in the next downturn," he says. "It's just impossible to keep these interest rates this low for much longer." Tied to the record consumer debt levels has been a surge in personal bankruptcies, which reached an all-time high of 1.6 million households in 2003. In its latest statistical release on consumer credit, the Federal Reserve reported Thursday that consumer debt reached $2.004 trillion on a non-seasonally adjusted basis in November, the latest reporting period. The figure covers most short- and intermediate-term credit extended to individuals, including car loans. It excludes loans secured by real estate, such as home mortgages. When mortgages are taken into account, the nation's households owe close to $9 trillion, Manning says. The $2 trillion figure represents a doubling of America's consumer debt in less than 10 years. According to the Federal Reserve, the debt topped the $1 trillion mark for the first time in December 1994. Of the total, commercial banks are owed the largest share, nearly $624 billion. More than $740 billion of the total is revolving credit, while $1.264 trillion is nonrevolving. On a seasonally adjusted basis, the consumer debt reached nearly $1.995 trillion in November, also a record. The only good news in the Federal Reserve figures, debt experts said, was that the seasonally adjusted debt grew at an annual rate of 2.4 percent for the month, down from 5 percent in October and 6.9 percent in September. But the overall problem may be worse than the latest record debt level indicates, said Manning, author of the book, "Credit Card Nation: The Consequences of America's Addiction to Credit." He traces the problem to a credit economy in which credit cards have become "yuppie food stamps," akin to a "social-class entitlement" rather than an earned privilege. Now, government figures show that three out of five U.S. families have credit card debt. "What's alarming is that [the consumer debt figure] doesn't accurately reflect the true distress on various segments of the American population," he said. Not included in the Federal Reserve figures are "new kinds of hybrid financial institutions and new loan products," such as those offered at rent-to-own stores. There, interest rates typically work out to more than 200 percent a year, and sometimes more, Manning said. In one such store catering to middle-class African Americans, he said, the annual interest rate came to 800 percent. Overall, Manning said, "the cost of borrowing on credit has tripled in real terms since the early 1980s." While many credit card companies offer zero percent introductory interest rates to customers with good credit, he said, the rates typically jump after the introductory period, and many Americans do not qualify for the low rates in the first place. Although the credit card industry says average household consumer debt comes to $9,000, Manning said, it is actually closer to $13,000 when the roughly 40 percent of households that pay their balances each month are taken out of the equation. "In the old days, the best customer was someone who could pay off their loan," said Manning, a professor at the Rochester Institute of Technology in Rochester, N.Y. "Today the best client of the banking industry is someone who will never pay off their loan," because then the client is more likely to incur fees. In 2002, the average household consumer debt translated into $1,700 a year in finance charges and fees, he said. In the long term, Manning said, the burgeoning debt "means our standard of living has to go down." Dvorkin agrees. "It's going to result in people having to work longer," he said. "Effectively, if this continues, the average American will not have enough to retire on and will not be able to retire." The record consumer debt also dovetails with other social problems, Dvorkin said. More than half of all marriages end in divorce, and "the number one cause of divorce is financial pressures," he pointed out. After reaching a new record last year, personal bankruptcies "will continue to grow," Dvorkin said. "It's very scary."
rimrocker, isn't this coupled with a new law pushed by the big financial companies to prevent the average American from declaring bankruptcy? Or did that get killed. I hope it did. The Middle Class should have the same "out" as the rich who fall on troubled times and make poor judgements.
my new year's resolution is to get rid of all my credit cards. they are worse than lonesharks and car dealers in MY opinion. thank god I don't owe them over 10,000 like many people I know here in Vegas.
My wife and I have not taken on a penny of new debt in three years. Getting rid of all our credit cards is second only to purchasing our house in smart financial moves. When they are finally paid off, that will be a very happy day around our house.
I think this bears restating... Although the credit card industry says average household consumer debt comes to $9,000, Manning said, it is actually closer to $13,000 when the roughly 40 percent of households that pay their balances each month are taken out of the equation. That means that about 60% of households carry at least $13k in debt and it means that there are a heck of lot of households carrying much more.
What is even more scary is that this debt is horrific for the economy. More money spent on instrest means less spent on goods and services as well as less investment. I remember hearing a radio interview with Allen Greenspan years ago and he said the best way for Americans to help get the country out of debt was to get themselves out of debt because that would mean more money put back into the economy instead of tied up in intrest charges.
I don't carry credit cards anymore. My problem with them was just the general feeling of not liking to continue to pay for something for an extended period of time. And while one does have the option of paying off the card each month, a person like me too easily falls into the trap of putting more on the card than I could pay off in a single month (especially since card companies will often increase one's limit, seemingly without consideration of the cardholder's ability to pay). I do finance cars, though (never for the very long term, though. With the mileage I put on cars, I know a five year loan is just going to cause problems. Three years has been the optimum loan length for me. And I have bought outright at a time when I had a good deal of money. My Audi was paid for from day one), and I would have a mortgage on a house if I had a house. But for general consumer goods, I don't have a problem with saving up for a few months to purchase what I'd like. Though I don't really buy that many big-ticket items anyway (defined as items that would take me more than a month to save up the money to pay for).
70% of the $10 trillion US annual GDP is directly consumer related. Rates of have been dropped to 45yr lows, taxes have been cut twice, and the public has been encouraged to buy buy buy all in an effort to spur on consumer spending and reflate the housing and stock bubbles. With interest rates so low, consumers are nudged out of low yield savings accounts and into already overvalued stocks and real estate. Debt does not just envelope consumers, however. The federal government itself is drowning in debt. States and municipalities are bankrupt from coast to coast. And corporations sneakily deplete funds from their employees' pension funds in order to service their huge debt shelves. If you have grandparent or an uncle or a neighbor older than say 65, go ask them what the tough times were like when they were growing up. They might be able to shed some light on what the future holds for you and your kids and possibly theirs.
Credit cards are one of the many tools of the Devil, for sure. I'm glad I was raised to save and invest as much as you can. Every car I or my wife has bought we paid cash for, even her Volvo. We each have a checkcard and a credit card, but I count on one hand how many times I've used my credit card last year. If you pay your bills on time, you should have no problems. But if you are like most schmos out there and pay the minimum payment every month, you deserve the hell that you put yourself through. I wish people weren't so carried away with instant gratification. Why do you need things now? If you save up for them, they become far more valuable. Trust me on that.
I love my Visa Check card. All the convenience of a credit card with none of the messy finance charges or balances. We have about $2000 in debt that we are retiring so that we can move towards buying a house.
I'm above average in the debt category, but that was due to being laid off...I agree some debt is good if used wisely, but now that I have a stable job again, paying cash and using my Visa checkcard are my priority...I'll be paying off my credit cards the rest of my life, but once I'm done, it'll be a happy day...
Jeff, anyone else, Are mortgage debts factored into this? If so, we're way, way above the average consumer debt. Otherwise, we're way below.
Bob: At $9000 i highly doubt mortgage debt is included. Plus you're in California, where buying a house means becoming an indentured servant to the bank. You don't seriously expect to pay that puppy off, do you?
The reason America's consumers are so deep in debt, is these f*cking credit card millionaires. These people earn $30K a year, but live way beyond their means. They drive a loaned BMW 325, and eat at PF Chang's on their Master Card. They open bar tabs that are charged on the plastic at the nice Midtown and downtown clubs, and buy chinos for full price at Banana Republic. Meanwhile, they're struggling to make the minimum payment on their credit card balance.
Seriously, this is so true, its not even funny. When I first moved to Dallas, I was in shock at the lack of financial discipline. Part of it is, I think, due to the fact that a lot of these millionaires" were employed during the boom era and got used to the high life. As they say, its not the high cost of living, but the cost of high living.
Years ago, I was thousands of dollars in debt and my credit report had so many red flags on it, it looked like the Rockets road uni's. I set a goal for Y2k to pay them off, restore my credit, and buy a house in five years. It was amazingly hard but I did it and I've had exactly zero debt for almost 2 years now. I'm buying my first house this summer, something I could only dream about 5 years ago. I now have one credit card that I put all my expenses on and I pay it off IN FULL online the same day I get it in the mail, no questions asked. Agree with Baqui99 110%. It's all about self discipline and responsibility. Credit is fine if you use it wisely. If you don't, you could literally ruin your life like I almost did.
