A couple, a child, two jobs and $30,000 in credit card debt.
It is the story of household finances stumbling, slipping and finally careening out of control. Like a record number of other American stories, this one is about to start a chapter called bankruptcy.
“I will have an ugly stain on my credit,” said Christine Muckle, 29, of Atlanta, a hairstylist for a decade. “There’s nothing I’m going to be able to do about the deal. My credit is going to be bad for seven years.”
As is true for many, it was a familiar formula — the sum of bad luck and bad choices — that landed Muckle in financial trouble.
She and her husband, Patrick, already had debt from four credit cards and were making the payments. Then, a year ago, her husband’s hours at an auto parts plant were reduced by 25 percent. At the same time, the hairstyling business struggled in an anemic economy.
The household’s income fell by nearly half, but Muckle confesses: She did not adapt her lifestyle.
“We put ourselves in this situation,” she said. “I know we could have lived below where we did, but I like to shop and have nice things.”
No minks. No Mercedes. But purchases added up fast.
“Luxury for me is a nice Coach bag, and I like jewelry,” Muckle said. “A nice pair of shoes on sale — so they might be $80 instead of more than $100. But $80 is still a lot of money.”
In the two years since the recession officially ended in November 2001, consumers like Muckle have propped up the economy. But they have taken on considerable debt in the process. The average credit card holder now carries about $8,500 in such debt and pays about $1,000 a year in interest charges.
Retailers have urged consumers on. Fear of an economic free fall after the terrorist attacks of 2001 incited low-interest financing of automobiles and other big-ticket items. Credit card companies, too, continued to market aggressively by mail.
Usually, when the economy weakens and layoffs mount, consumers back off the plastic. Not this time. Spurred by low-rate come-ons, Americans signed up for millions of cards — and used them. The proportion of income going to monthly payments rose to an all-time high of 13.6 percent at the end of 2001.
That tab has declined only slightly. In the second quarter of 2003, monthly payments were eating up 13.3 percent of disposable income, according to the Federal Reserve Board.
By last November, U.S. consumer credit totaled nearly $2 trillion. Most of the growth came from auto purchases, while credit card balances declined slightly.
Worriers have been warning of the danger every time debt has spiked since the 1980s. But Americans seem blase, taking on more debt and debt payments even as the economy bumped through its most recent rough patch.
The sum total of their debt doesn’t even occur to them, it seems, said Paul Kasriel, chief economist at Northern Trust. “I think we’ve got a what’s-my-monthly-payment kind of society.”
Paycheck to paycheck
Americans often do not run into trouble with debt until the equation changes. Sudden medical costs, the loss of a paycheck and a family crisis like a divorce are the most common reasons for bankruptcy.
That is the great peril. Roughly 2.4 million jobs have been lost since early 2001. Recent job gains have been feeble. And while inflation has been weak, wages are barely keeping up.
“People think that if they can make the minimum payment, they are OK,” said Suzanne Boas, president of Consumer Credit Counseling Services of Greater Atlanta. “Well, it depends on what you mean by OK. There is a very significant proportion of the American population that lives one paycheck away from disaster — when they lose a job, it is a very serious, immediate problem.”
Credit card delinquencies climbed to a record 4.09 percent of all accounts during the third quarter of last year, according to the American Bankers Association.
Personal bankruptcies, too, have been climbing. In the year ending Sept. 30, 1.66 million bankruptcies were filed — up 7.4 percent from the year before, according to the administrative office of the federal judiciary.
Muckle had three platinum cards: The limit on one was $12,000; on a second, $8,000; and a third, $6,000. Her husband had a fourth card with a $4,000 balance.
When money got tight, Muckle kept current with mortgage and car payments by paying them with her credit cards, she said. Before long, she had hit the limits on the cards.
“It drove my bills way up,” she said. “We hit the wall.”
Combined minimum payments on the credit cards amounted to $500 or more a month. Some months, the couple didn’t make it. With late fees and interest, the total they owed ballooned. They gave up trying.
“It has been about eight months since I paid a credit card bill,” Muckle said.
She and her husband sought credit counseling. But their debt — credit cards, car lease payments and other bills brought the balance to $53,000 — rivaled their income. It was too late to avoid bankruptcy.
Consumer Credit Counseling Services, a nonprofit agency, held 41,378 introductory sessions with consumers seeking help last year. The vast majority of debtors were able to set up a payment schedule with creditors, Boas said.
The agency sent 3,356 — about 8 percent — to find a bankruptcy lawyer.
Debt strains economy
The economy benefits from consumer debt, because credit amplifies every household’s purchasing power.
But that reliance can strain the economy, particularly if millions of households are struggling to stay afloat financially.
About 18 percent of all U.S. personal consumption expenditures are made on bank credit cards, according to CardWeb, a research firm tracking the payment card industry. If retail and debit cards are included, the figure rises to 24 percent.
The average household pays interest charges of $1,000 a year, according to CardWeb. Add in fees of various kinds for those who carry a balance, and companies are making an average of $1,700 a year per household, said Robert Manning, a professor at the Rochester Institute of Technology and the author of “Credit Card Nation.”
Banks encourage the least disciplined consumers to flirt with disaster because — so long as they stay afloat — they are the most profitable, Manning said. “The banks are playing a dirty game.”
There are no industrywide standards for deciding who qualifies for more credit. Each bank decides how much risk to take with every potential customer. But the judgment-making should be mutual, said Heather McElrath, spokeswoman for the American Bankers Association.
“The banks offer instant access to credit. They offer convenience,” she said. “How much responsibility does the consumer take to make sure they don’t get into trouble? It’s a balance.”
Four-decade lows in interest rates have kept monthly payments within reach. But let those rates rise, and the rate of defaults on credit cards, as well as bankruptcies, almost certainly would climb.
Still, even the worriers say high household debt can be manageable. More money flowing to American households would gradually ease the financial burden — if the economy produces pay raises and jobs.
But that isn’t happening.
“All in all, the picture is not rosy — it’s really alarming,” said Dimitri Papadimitriou, president of Bard College’s Levy Economics Institute, which has repeatedly warned that debt is a menace. “If the economy isn’t growing and doesn’t produce jobs, then the time of reckoning comes nearer.”
For Christine Muckle, the reckoning is already here.
With three of the cards in her name, she will take the hit, and hope for the best.
“We decided that my husband’s credit was easier to fix, so we set up a payment plan for his bills,” said Muckle, who plans to file alone for bankruptcy protection. “I just can’t stress about it anymore. Hopefully things will get better soon.”
Source Citation (MLA 8th Edition) Kanell, Michael E. “DEBT BURIED CONSUMERS AS BUYING LIFTED ECONOMY.” Atlanta Journal-Constitution [Atlanta, GA], 18 Jan. 2004, p. A1. Infotrac Newsstand, http://link.galegroup.com/apps/doc/A112287531/STND?u=fairfax_main&sid=STND&xid=33bbe44b. Accessed 24 Mar. 2019.