House of credit

A Santa Rosa woman in her 30s, college educated and earning about $70,000 a year, was doing fine until her marriage ended.

With a mortgage, home equity loan, car loan, credit card debt and two children to support pending a divorce settlement, she started using plastic to pay for living expenses. She maxed out her cards at about $60,000 and started missing payments.

As a penalty, her credit card interest rate tripled to about 30 percent.

The woman was in the "sweatbox," a term for people squeezed by credit card debt that saps their finances and takes years to repay. The longer the debt goes unpaid, the larger the profit for the credit card companies.

With America's total credit card debt approaching $1 trillion, she had plenty of company, according to figures from the government and a credit-tracking firm.

Consumers charged $68 billion worth of purchases last year, boosting credit card debt by 7.8 percent, the largest increase in seven years.

That rising personal debt is bad news for a nation teetering on recession. The estimated $132 billion a year spent on credit card interest takes money away from purchases of goods and services, contributing to the nation's economic slump.

About 40 percent of consumers either use no credit cards or pay their balances every month, but 60 percent carry balances from a few hundred dollars to more than $25,000, with interest averaging 16 percent.

"Credit cards can get you in a lot of trouble," said Bob Imhoff of Napa, shopping at Santa Rosa Plaza last week.

Imhoff, who carries "probably a dozen" cards from banks, department stores and gas stations, said he ran up a sizeable balance while remodeling his house, but paid it off six months ago.

Now he reserves his Visa card for big purchases and pays the monthly balance. "It's convenient," he said. "Easier than carrying around money in your pocket, which is dangerous these days."

Robert Persi of Santa Rosa said he lives on a fixed income and can't afford to use credit cards. "If I had them, I'd probably max them out like everybody else," he said.

The average U.S. household spends 15 percent of its disposable income on mortgage and credit card interest combined, a ratio that has increased 25 percent in the past decade.

"That's pretty significant," said Steve Cochrane, an economist with Moody's Economy.com in Philadelphia. As debt service increasingly hobbles consumers, the economy suffers, he said.

"We really can't count on the consumer to drive this economy," Cochrane said.

Big spenders

The credit card crunch, which afflicts the affluent as well as the indigent, is the product of a free-spending population that saves almost nothing, packs handfuls of plastic cards in their wallets and has nothing but credit to fall back on in the event of a personal setback or unexpected expense.

"Typically, as a society we spend what we make -- and then some," said Jeannine Moore of Consumer Credit Counseling Service, a nonprofit organization with offices in Santa Rosa and San Francisco. The organization helped more than 29,000 individuals and families last year and expects to see more this year, she said.

The Santa Rosa woman who wound up $60,000 in debt got back on track with help from Moore's organization.

For every $1,000 in disposable income the average American had in November, he or she spent $1,005, according to the Department of Labor's Bureau of Labor Statistics.

Homeowner equity, long used as a means of absorbing unexpected costs, has been eroded by the housing slump. Also exacerbating the crunch are banking practices critics say are predatory and unregulated credit card interest rates that have soared as high as 36 percent.

"Thirty-six percent used to be usury in this county," said Ed Mierzwinski, consumer program director with U.S. PIRG, a nonprofit public interest advocacy group.

Total credit card debt hit $943.5 billion at the end of 2007, according to the Federal Reserve Board. It has grown 22 percent in the past five years and more than doubled since 1996.

The debt amounts to more than $3,000 for every person in the nation, but actually falls unevenly over a population of reckless spendthrifts and disciplined consumers.

About 175 million Americans pay with plastic. The average cardholder has seven bank and retail credit cards; only 7 percent of consumers have none, according to various estimates.

Monthly payments

About 30 percent of cardholders pay off the balance each month and incur no interest. But 14 percent carry a balance of $10,000 to $25,000, and 8 percent owe more than $25,000, according to a 2007 survey by CardTrak.com, an online credit card information service.

"The nation is bloated with credit card high-rollers who carry five-figure balances," said Robert McKinley of CardTrak.com.

Based on its survey of more than 55,000 consumers, CardTrak pegged the median cardholder debt at $6,600 (meaning half owed more and half owed less), and the average revolving credit card debt at $9,840.

Some experts say median debt is a fairer picture because the average is skewed upward by a minority of debtors with sky-high balances.

Are we in debt over our heads?

Every dollar spent on debt service, estimated at $1,500 a year per household, is diverted from consumer spending on goods and services. That loss ripples through the economy, crimping retail sales, orders from manufacturers and ultimately jobs.

But experts say it's hard to put a cap on debt.

"We have no idea how much (debt) is too much," said Adam Levitin, Georgetown University associate professor of law. "We may have hit it a long time ago; we might not have hit it yet."

Rob Waller, a debt counselor with Consumer Credit Counseling Service in Santa Rosa, is stunned by the cases he sees.

Five years ago, people came in with debts typically in the $30,000 to $40,000 range, paying interest as high as 27 percent. Waller said his clients now have $60,000 to $80,000 in debt, with interest rates as high as 36 percent and crippling monthly payments of $2,000.

He recently counseled a businesswoman whose enterprise had faltered, prompting her to live off credit and run up a balance of $186,000.

He sees people often handling five or six cards; one person held 22. Consumers falling behind may use one credit card to pay off another: "A sign you're in major trouble," Waller said.

Escalating mortgages, a by-product of the housing slump, have forced some people to choose between keeping their homes and paying down their credit cards. Gasoline costing more than $3 a gallon is another pinch, obliging some consumers to use credit for groceries and other basics.

Some use gas cards to buy food at convenience stores, a double-whammy because the debt adds up and the prices are high, Waller said.

"Unfortunately, people have no choice," he said.

Waller said he's helped doctors and attorneys as well as low-income people stabilize their finances. Some people simply spend too much, and others are trapped by a life-changing event -- divorce, injury or unemployment.

Few people have a cushion to absorb the shock. "People don't save like they used to," Waller said.

The national savings rate, calculated by the U.S. Department of Commerce, was 10 percent to 11 percent in the early 1980s. Since 2005, Americans have saved less than 1 percent of their disposable incomes.

Home equity loans have been a popular remedy for burgeoning credit card debt, but slumping property values -- and repeated use of such loans -- have eroded the ability of many to borrow against their homes.

In a softening housing market, the "home equity piggy bank is empty," Levitin said.

The upshot, said credit counselor Moore, is that many Americans are "living paycheck to paycheck, even if they are large paychecks."

'Highway robbery'

Critics fault the banking industry for aggravating the credit card crunch. In 2006, consumers received nearly 8 billion direct mail credit card solicitations, according to U.S. PIRG.

Card companies sweeten their pitch with introductory interest rates as low as 4 percent to 5 percent -- which critics call "teaser" rates -- and rewards programs that offer airline travel and other prizes.

Promotions aimed at college students are especially heavy, resulting in a credit card debt of nearly $4,000 for the average college graduate, U.S. PIRG said.

Stiff fees for late payments and exceeding limits compound debt load. In 2006, credit card companies made more than $17 billion in penalty fees, U.S. PIRG said.

An Ohio consumer last year told the U.S. Senate Permanent Subcommittee on Investigations that he exceeded his $3,000 card limit by $200 when paying for his wedding. Over the next six years, he made payments totaling about $6,300 and still owed $4,400 -- a total of $10,900 in charges for $3,200 in purchases.

Sen. Carl Levin, D-Mich., the subcommittee chairman, called it "highway robbery."

Waller and others fault a practice called "universal default," in which one credit misstep -- such as a late payment or merely inquiring about an auto loan -- bumps up the rate on all of a consumer's credit cards.

Some credit card contracts say in fine print that the company may change terms, including interest rate, "at any time for any reason, including no reason," U.S. PIRG said in its Consumer's Guide to Credit Cards.

"It's kind of a perverse business now," said Cyndi Geerdes, a University of Illinois law school associate professor who runs a consumer debt clinic.

In a report to Congress last year, the Federal Reserve Board said: "Although profitability for the large credit card banks has risen and fallen over the years, credit card earnings have been consistently higher than returns on all commercial bank activities."

The credit card industry discourages "sustainable debt levels," Levitin said. The longer a consumer makes monthly minimum payments but doesn't reduce principal, "the more profitable the consumer is to the card issuer," he said.

Bank of America, the nation's leading credit card issuer with 40 million accounts, puts a premium on informed customers, spokeswoman Betty Riess said.

"We continue to educate our customers about products and tools that help them manage their accounts," she said.

Nearly 94 percent of BofA's customers ended 2007 with the same credit card interest rate or a lower rate than they started the year with, Riess said.

The average bank credit card variable interest rate rose from 10.95 percent in January, 2004 to 16.55 percent in December, 2006, according to CardTrak.com.

An underlying problem, consumer advocates say, is that Americans don't know much about managing money. Manisha Thakor, author of a personal finance guide, said that her subject "like parenting, is one of those things you are expected to pick up along the way."

Parents should educate children, especially before they go off to college, about finance, Waller said.

Those who stumble into deep debt can seek professional help or cope with it on their own, he said. Most debts can be negotiated, and Waller recommends writing lenders rather than calling because the letter eventually will reach the right person.

To curb spending, he suggests tactics like surrendering your plastic or taping the strip on back of the cards, forcing you to stop and think before swiping it again.

You can reach Staff Writer Guy Kovner at 521-5457 or guy.kovner@pressdemocrat.com.

$943 billion

Total credit card debt in United States

1.2 billion

Number of credit cards

7

Credit cards

per cardholder

$9,840

Average debt

per household

$1,500

Annual debt service cost per household

7%

Household with

no cards

32%

Those who pay off cards monthly

8%

Those who owe

more than $25,000

0.5%

U.S. savings rate

Sources: CardTrak.com, U.S. Department of Commerce, Federal Reserve Board