King Kong Debt Meets Middle-Class Life

Ask most people if they should save more, and the likely response would be "yes." But with so many opportunities to spend, sometimes we just can't help ourselves.

Shopping is even seen as an expression of patriotism: Go ahead, buy the latest gadgets, a bigger car, or another pair of spike-heeled shoes, it will be good for the economy.

The only drawback: that stubborn monthly balance on the credit-card bill. For the average American family, it's been growing steadily over the past few decades, lurking like a visitor who's overstayed his welcome — and no one knows quite how to get rid of him. Somehow, people have drifted away from the thriftiness that emerged from the Great Depression and embraced life on borrowed time.

"Americans really appear to have accepted debt almost as a way of life — they assume that's just the way it goes," says John Putnam of the Million Dollar Round Table, an association of financial planners in Park Ridge, Ill. The group found in a recent survey that 30 percent of Americans believe they probably will always have debt.

Statistics confirm the change:

  In 2003, the average credit-card debt of U.S. households with at least one card was $9,205, up from $2,966 in 1990, according to the research firm CardWeb.com.

  In 1970, 44 percent of families with credit cards reported having a balance after their most recent payment, the Federal Reserve Board reports. Since the 1980s, not only have more people used credit cards, but about 60 percent have carried a balance.

  The personal savings rate in the United States averaged about 8 percent from just after World War II through the 1980s. But since 2000, it has averaged just under 2 percent, according to the Bureau of Economic Analysis.

  Personal bankruptcy filings hit a record 1.6 million in 2003, compared with 300,000 a year in the early 1980s.

Debt may not be as widespread a problem as smoking or overeating, but it's gaining attention as perhaps a form of addiction. Yes, overspending is largely a matter of personal choice, but many observers say an increasingly materialistic culture conspires against people's desire or ability to act wisely. Still others call for reform of certain practices in the credit-card industry that make it easier for people to build up balances to the point where they are trapped.

Mounting Materialism

The generational shift began with the baby boomers, indulged perhaps by parents compensating for their own Depression-era childhoods, experts suggest. Also, the entry of women into the workforce led to families with more money — and less time — to spend on or with their children.

"Living within your means today is countercultural," says Nathan Dungan, author of "Prodigal Sons & Material Girls: How Not to Be Your Child's ATM." Especially for young people, he says, "it takes some real fortitude to be able to withstand the constant barrage of the marketing and the cultural pressure."

After growing up with commercials and pop-up ads at every turn, 7 out of 10 college freshmen say it's "very important" or "essential" to be well off materially - up from 4 out of 10 in 1966, according to the Higher Education Research Institute at the University of California at Los Angeles.

Couple that attitude shift with the fact that more than three-quarters of college students have credit cards and it's no surprise that some are distracting themselves with serious debt, Dungan says. By age 21, 1 out of 7 Americans has more than $7,000 in card balances, according to American Demographics Magazine. And the under-25 set are one of the fastest-growing groups (though hardly the largest) declaring bankruptcy.

A Campus Protests

The University of Minnesota went against the tide in 1998 by deciding to allow no more credit-card vendors on campus. When a health study found that credit-card debt was often linked to depression, drinking and smoking, and declining grades, the school also brought a credit counselor onto campus.

"I don't think students are more in trouble than [other] Americans in terms of overspending — they're just … the least experienced," says Darryl Dahlheimer of Lutheran Social Service Financial Counseling, the group hired by the Twin Cities campus. "We work with a ton of bitter 30-year-olds who have paid for a decade on a card they got in college … so we figured: 'Why not go upstream?' "

It is the only such service on a college campus as far as Dahlheimer knows. So far, about 25 percent of his student clients have needed credit consolidation. It typically takes four or five years for them to pay off their debts.

Debt is an "epidemic," Dahlheimer says, and he considers his work a "thimbleful of help" in the face of a credit-card industry that actively targets young people. He recalls one student who signed up for two cards in a week just because the vendors were offering free cookies.

Industry representatives counter that college students' debt problems are overblown. They have an average credit limit of just $1,395, says Daniel Drummond, spokesman for Your Credit Card Companies, an educational campaign set up by a group of major financial-services firms. He cites a 2002 study by the Credit Research Center at Georgetown University, which found that college students are more likely than others to pay their balance in full; only 5 percent incurred more than $26 in finance charges in a given month.

Yet consumer advocates say it's getting harder for people to keep up with potential pitfalls in the fine print. Cards with low interest rates, for instance, often raise the rate substantially if the cardholder makes one late payment.

Those who get by just paying the minimum monthly charge may not have noticed that the typical minimum has been lowered in recent years from 5 percent to just 2 or 3 percent, according to De-mos, a research and advocacy group in New York. With an interest rate of 15 percent, it calculates that it would take 32 years to pay off $5,000 by making only 2 percent minimum payments. It also warns about bigger late fees: Revenue to credit-card companies from late fees jumped from $1.7 billion in 1996 to $7.3 billion in 2001.

Credit-card companies are simply responding appropriately to risk, Drummond counters. "[They] have built very sophisticated systems to determine which customers handle their credit responsibly." Only 3 percent of cardholders are more than 30 days past due.

Bad Habits

But credit cards can facilitate bad habits, critics say. "Money is somewhat abstract when people use credit cards," says James Roberts, a marketing professor at Baylor University in Waco, Texas. He's found that people spend up to 50 percent more in places such as fast-food restaurants when using credit cards.

The deeper issue, he says, is that shopping is considered a socially acceptable way to deal with stress or depression. Compulsive spending is now considered a disorder for a small portion of Americans — up to 6 percent, studies suggest. Worse, Roberts says, his research shows that 1 in 10 college students buys compulsively — a higher share than previous generations.

If someone is lonely, a salesperson might be the easiest one to turn to, says April Lane Benson, a psychiatrist in New York and author of I Shop, Therefore I Am: Compulsive Buying and the Search for Self. Others may have come from frugal families and decided that they would never feel deprived again.

"Buying is such a quick fix, as compared to, say, going for a hike," she says. "It's important to discover the underlying needs and create the time and space to meet those needs in other ways."

Debt Pressuring Economy?

Are Americans' debts driving the economy into a danger zone? It's a huge and unanswered question.

While it's true Americans are carrying more debt than ever — about $9 trillion worth — most households are able to handle the load so far. On the other hand, rising interest rates and high oil prices cloud the horizon. Much depends on the economy's recovery.

What is clear is that high debts have made consumers less likely to serve as the engine that drives the economy and more vulnerable to an external shock. The most vulnerable are the poor.

Consumers have borrowed to the point where they won't be able to go on a "borrow-to-spend binge" that could spur economic growth in the next few years, says Scott Hoyt, director of consumer economics at Economy.com. Also, if there's an economic shock "instead of just a temporary slowdown in economic activity, [the debt burden could] tip the scales and turn it into a full-blown recession."

That's not something he foresees happening. Other economists do.

What's important to watch, economists agree, is not today's record level of red ink but rather the debt burden — the portion of disposable income used to pay mortgages and consumer loans (known as the debt service ratio). In the first quarter of this year, that ratio stood at 13.0 percent. Since 1980, the ratio has fluctuated between 10.6 and 13.3 percent.

For most Americans, debt remains a manageable means to an end. The vast majority of it is connected to paying for a home, college tuition, a small business, or a car for commuting to work.Typically, such debt is insulated from short-term swings in interest rates.

Overwhelming the Poor

But debt also can be overwhelming, especially for the poor. Of those households in the lowest income bracket, 27 percent have to devote $4 of every $10 in take-home pay to debt payments. In the general population, only 11 percent of households have to devote so much income to debt, according to an analysis by the Federal Reserve Board.

More controversial is the surge in credit cards. On the plus side, credit is now more easily accessible for a diverse cross-section of Americans than it was in the 1960s. The expansion has enabled more people to finance large purchases and even entrepreneurial ventures.

More than 190 million people now carry credit cards, according to research firm CardWeb.com. For the 40 percent who pay off their bills in full each month, the cards are a matter of convenience and rewards such as frequent-flier miles. They're part of the reason that outstanding consumer credit — the portion of debt not secured by real estate — topped $2 trillion for the first time this year.

But for the 60 percent who don't pay off their balances monthly, debt burdens can mount quickly.

In fact, credit-card balances carried by the poor have grown at a faster clip than any other income group. Between 1989 and 2001, households with incomes under $10,000 that carried credit-card balances saw those balances rise 184 percent, compared with a 53 percent increase for all income levels combined.

Tremendous growth in subprime lending in recent years has also given access to credit to many consumers who need it and manage it well. But critics charge such lending involves "predatory" practices — everything from aggressive marketing to high penalty fees buried in the fine print.

"Although credit [terms] are supposed to be risk-based, lenders are charging more than the applicable risk" to people such as minorities, the elderly, and low-income families, says Karen Gross, a consumer-debt specialist at New York Law School.

Even for families who are relatively disciplined about their spending, mounting debt can be hard to avoid. The average dual-income family's discretionary income after paying for fixed expenses — such as child care, health insurance, mortgages, and taxes — is slightly less now than it was for one-income families in the early 1970s, according to a report by The Century Foundation in New York.

Entire communities can feel the ripple effects of heavy debt — if there's a rash of home foreclosures, for instance. But because the growth in subprime lending is a relatively recent phenomenon, it's hard to predict what it will mean for the economy as a whole, notes Professor Gross.

"It's a new world with new borrowers, and where and when the system sort of overstresses, I don't know," she says.