Last year, Deborah Mann spent about $400 on Christmas gifts. This year, she’ll spend less than half that.
That’s because a decade of overspending on her credit cards has left her so far in debt that she’s having difficulty making her mortgage payments.
The Los Angeles secretary is by no means unique. After years of running up huge credit card debts in an unprecedented spending spree, American consumers are finally showing signs of over-extension.
Bank credit card delinquencies have risen to a four-year high, according to figures released last week by the American Bankers Assn. Meanwhile, consumers are flooding debt-counseling offices in Los Angeles and around the country.
With a recession around the corner, bankers and retailers are understandably worried. Never before have Americans been so in debt at the beginning of an economic downturn. No one knows exactly what will happen to consumers, their creditors and vendors as the expected recession worsens.
“If you are a banker, this is the time to worry,” said Sandra Shaber, vice president of The Futures Group in Washington. “Banks have seen all types of debts go bad. And now, what seemed to be a relatively safe haven--consumer debt--is softening too.”
Roughly 4% of the bank card balances outstanding were more than 30 days past due during the third quarter of 1990, according to the American Bankers Assn. That’s the highest level for such delinquencies since 1986, when it went as high as 4.9%.
How Americans got into this sorry state is a matter of debate. Some blame the government, which for years encouraged such borrowing with tax breaks. Some blame inflation, which made debt seem attractive because consumers knew they’d be paying it back with dollars that were worth comparatively less. Others blame the banks and credit card companies, which continued to send credit applications to people already living on the edge.
Anecdotal evidence certainly indicates that consumers are troubled.
In the last three months, literally hundreds of Los Angeles residents have flooded into credit-counseling offices complaining that they can no longer handle all their debts, said Pam Tobias, general manager of Consumer Credit Counseling Service, a nonprofit organization that helps overextended individuals set up debt repayment plans with their creditors.
“We have seen a 30% increase in appointments just since August,” Tobias said.
And that trend is mirrored nationwide, said Jay Muzychenko, vice president of the National Foundation for Consumer Credit. Muzychenko’s organization counseled more than 300,000 consumers last year, and he expects that figure to jump between 30% and 40% in 1990.
Problem cases, Tobias said, include a Los Angeles-area woman in her 20s who, between credit cards and student loans, had run up $20,000 in debt. And a local couple with two children and $30,000 a year in take-home pay were falling about $400 a month short on their mortgage, car and other debt payments because of $29,000 in credit card debts.
People coming in for credit counseling, Tobias said, range from those with annual incomes well over $100,000 to people on food stamps.
Deborah Mann also is a credit counseling client. For the last several years, she had been using her credit cards to supplement her monthly income. If she could not afford it, she just charged it.
“It was a matter of keeping up with the Joneses. I knew I didn’t have the money, but I wanted to leave an impression on my kids that we could have things and go places,” she said. “But it got to the point where every month I was $250 to $300 short.”
Mann borrowed so much that she was paying $600 a month--nearly half her take-home pay--just for the minimum payments on her credit cards. She became delinquent and is now on a payment plan with her creditors. Her credit card debts now total $7,000.
“I had to stop spending. I was at a point where I couldn’t even meet my mortgage payments,” she said. “We are not going to have a big Christmas. But, hopefully, we are going to have a meaningful one.”
Economists believe that the high rate of credit card delinquencies accounted for by consumers like Mann is a troubling sign for more than just bankers. Credit card delinquency rates are a leading indicator of consumer financial health, experts say.
There is a hierarchy of debt payments, said Jack Kyser, chief economist with the Los Angeles Area Chamber of Commerce. Consumers in financial trouble are likely to stop paying on their credit cards before they default on other types of debts, such as car and house payments.
Historically, too, when consumers have had trouble making such payments, they start to scale back, said Gary Schlossberg, senior economist with Wells Fargo Bank in San Francisco.
In other words, the dramatic slowdown in spending that has troubled retailers this Christmas is likely to get worse, Schlossberg said.
“Delinquencies on credit cards are particularly alarming because the minimum payments due on a credit card represent a tiny fraction of the total amount due,” added Elgie Holstein, director of Bankcard Holders of America in Herndon, Va. “So, when people are delinquent in paying even the minimums, it is a sign of potentially serious future financial problems for individuals and for the economy as a whole.”
Although economists said that some increase in consumer delinquencies is expected in times of economic weakness, they are particularly worried now because consumer debt levels are high.
The last time the United States was in a recession, consumer debt as a percentage of income was at 14.1%. Now, it is 18.4%. Bank card debt outstanding has quadrupled over the period, totaling $132 billion versus only $31 billion in 1982, Holstein said.
But Schlossberg, who is studying consumer debt, said that there are some encouraging trends. He believes, for example, that the nation’s most affluent consumers are also the most indebted, and they, after all, are best able to handle it.
Still, he said, delinquency rates are sure to rise in coming months.