Financial crack

The credit industry is getting wilier about taking our money, and addicted-to-spending Americans are letting them have it.

Published April 26, 1999 4:00PM (EDT)

Vince Passaro became a pariah of magazine journalism for his August 1998 Harper's essay, "Who'll stop the drain?" detailing his descent into $63,000 worth of debt on a $100,000 annual income. Fire and brimstone letters poured in. How dare he not be ashamed? How dare he write about insolvency and poor decision-making and yielding to temptation as if it were ... common? This is America -- we don't discuss our finances (at least not if they're bad). We don't talk about debt in public.

The Federal Reserve does, though. And according to the Fed, there's $575 billion in revolving consumer debt out there somewhere. Credit counseling centers are booming -- one expects to generate $3 million in revenue in only its second year. Bankruptcy filings (96.9 percent of which are by consumers) have set records each of the last three years. Who are we trying to kid with this Puritan outrage when one of us breaks the code of financial silence?

Americans love to spend money, and that's all there is to it. Shopping, not baseball, is the real American pastime. Go visit a relative and they just have to show you "our" mall, like it's a natural wonder. Go abroad, you'll always be able to tell the American tourists at a glance: They'll be the ones who, when visiting a cultural landmark, head for the gift shop before viewing the landmark itself. Business, of course, is more than happy to accommodate us. Credit card issuers mailed out 2.3 billion card offers in 1997, and are raking in the bucks Bill Gates-style. Visa alone saw a 3.4 percent increase in the number of cards issued in 1998, inflating its credit volume by nearly 10 percent. Overall, revolving debt increased by 12.2 percent last year, with the average debtor owing $7,000 to $8,000. The interest on that debt, my friends, is only the beginning of the road to debtor's hell. Credit card companies keep inventing new and improved ways to separate us from our dollars -- and we go for them every time.

"The good news for consumers is the increased price competition, which has driven down rates across the industry," says Stephen Brobeck of the Consumer Federation of America. Until a few years ago, the typical credit card interest rate was about 18 percent. Now, however, those 6,000 competing credit card issuers have brought about such bargains as introductory ("teaser") rates as low as 3.9 percent, grace periods, cash rebates, free gasoline, frequent flier miles and charity donation matching. "These new low rates have drastically lowered the credit card companies' profitability, so they make it up elsewhere," says Brobeck. How? "By moving people as quickly as possible into the penalty categories."

MBNA, for instance, collected $841 million in "non-interest revenue," much of it penalty fees and other dings on consumers, in 1998 -- a 20 percent increase over 1997. Another company reported a gain of 120 percent. Grace periods have shortened from 25-30 days to 20-25. (Check your fine print: Payment must not only reach the creditor by a certain date, but by a certain time on that date.) The current average late fee increased 56 percent in the last two years, to $22.10. Over your limit (even if the charge is approved)? The current average fee for that is $21.14, an increase of 52 percent; 10 years ago, that category didn't even exist. Convenience checks, too, often carry "stealth" fees (not to mention that they are treated as cash advances and accrue interest at the highest possible rate, with no grace period).

The minimum payment is calculated on only 2 percent of the outstanding balance; it used to be 4 percent. Make just the minimum payment, and you'll have a relationship for life. And the low teaser rate that suckered you in in the first place usually expires within five to nine months; even before that, though, being late just once can jack the rate up as much as 20 percentage points. Twice? Forget about it.

Twenty million credit card accounts were bought and sold between companies last year; if yours was one of them, you know that the acquiring company can just wave the magic calculator and jack your interest rate up like a Hollywood hemline. On second thought, you probably don't know you've been jacked, because all they have to do is send you one of those gobbledygook, fine-print legalese notices none of us ever bothers to read. Another moneymaker for our creditors is to make deals with telemarketers, supplying them with portions of our credit files so they can solicit us for more useless things. The telemarketers then call in the middle of dinner and tell us about their "free, no risk" trial membership in a ridiculous new way to take our money -- it started with dining clubs and travel clubs -- and the pair of sneakers or free 35 mm camera en route to us today ("That's right! Today!") just for giving them a try. You accept the "free" membership thinking that because you never gave out your credit card number, you haven't bought anything yet. Anyway, you'll get a bill.

You are wrong. Next month, you notice a $59.95 charge on one of your 12 Visas and wonder what the hell the "Outdoor Explorers and Needleworkers Club" is and why they have your dough. They have your dough because your helpful credit card company fills in the blanks for them. At this point, you can probably get a refund, but it won't be easy. The average debtor often doesn't notice the "trial" membership until it's too late. Possibly this is because the average debtor is getting younger and younger.

The credit card companies actually target college kids. You know, those people engaged in an activity primarily intended to equip them to make a living -- later -- and, uh, pay their bills. Future bills. College kids, by and large, have the kind of jobs that require hairnets and ought to be paying for beer, condoms and marijuana-laced trips to foreign countries that they will only hazily recall afterwards. Increasingly, many are having to work to be able to afford to go to college at all. To the untrained eye, they would appear to have little to offer a sane credit lender. Except, of course, for parents likely to bail them out. They're not even considered high risks (only those under 18 need parental consent or a cosigner; often parents first learn of junior's credit card when those nasty "give us our money" phone calls start coming). Bombarded with card offers from the first day of freshman year, the number of full-time students with cards in their own names rose from 58 percent in 1996 to 63 percent last year. Many pay in full each month, but more and more make only the minimum payments, with which it can take consumers between five years and a full millennium -- depending on the hysteria factor of whoever's doing the calculating -- to pay off a $500 debt. Suffice it to say that the minimum payment is for suckers.

A University of Minnesota study showed that two-thirds of students being treated for depression had more than $1,000 in credit card debt. As debt increased, grade-point averages plunged. And students with high balances worked more hours and dropped more classes. Duh. If you want a surprise, though, here's one: Professor Elizabeth Warren of Harvard Law School projects that 150,000 people younger than 25 will declare personal bankruptcy in 1999. No wonder people in their 20s think reality bites.

In 1998, 160 four-year schools barred card marketers from their property. Other schools have merely raised the price of access, while some that allow marketers access restrict their movements and tactics. In acknowledging that costs and other barriers have risen in targeting the college crowd, Ed Stanley, president of a firm that markets credit cards to students, told the American Banker, "We simply have to be more creative." Did anybody else's skin just crawl?

And while it's working harder to hook you, the credit industry is also trying to make it harder for you to slip the hook and get relief from your debts. HR833, the Bankruptcy Reform Act of 1999 (and its Senate counterpart, SB625), are percolating through Congress, determined to make it more difficult for debtors to discharge debt through Chapter 7 "fresh start" bankruptcy. The bill would cattle-prod them straight to Chapter 13, which requires court-overseen debt prioritization and repayment. Given all the "personal responsibility" and "bankruptcy abuse" rhetoric zinging around Capitol Hill, the insolvent can only thank God that bankruptcy is a constitutionally protected right. Rep. Sheila Jackson Lee, D-Texas, calls it "financial crack" -- a "consumer lending industry [that] actively solicits unsuspecting consumers through the mail with terms of easy credit [and] buy-now-pay-later jargon. And then after addicting debtors, lenders are advocating for [bankruptcy] reform. Of course, debtors are responsible for financial obligations that they incur; however, lenders must assume responsibility for their actions in creating [this] precarious financial crisis." A similar reform attempt died in the Senate last year, but that battle is far from over.

Of course the credit card companies are trying to make consumer bankruptcy more difficult even as they make more and more irresponsible loans (their debt loss rate -- debts that must be written off -- is at least 2 percent higher than in the 1970s). You can't blame them, though. We just make it easy for them. Ninety-six percent of consumers pay their bills on time; only 1 percent end up in bankruptcy. Those who do usually have staggering medical bills, a recent divorce or bouts of unemployment: They have an excuse. But the rest of us just shop and shop and shop. Make the minimum payment. Shop some more.

Legend has it that David Talbot financed Salon partially with credit cards. I financed my writing career that way. Fledgling directors have gambled everything to bankroll their movies with this insidious plastic. What are you mortgaging your future for? Like Vince Passaro told Salon in his own defense earlier this year: "There's a big problem out there, and not just with the Passaros."

By Debra Dickerson


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