Many Americans charge wisely, but more carry deeper
And you thought
all this election stuff was divisive.
Check out the chasm that exists among credit
card users in America. On one side there's the no-worries, no-interest
people who pay off their cards every month like clockwork. On the
other side you'll find the "let it ride" crowd who carry balances,
month after month after month.
It's a great American divide. And this one can't
be blamed on anyone in the state of Florida.
Convenience vs. compulsion
About 40 percent of credit card users pay off their cards each month.
The remaining 60 percent carry balances. This split in credit-spending
patterns has been happening for years, and the gap seems to be widening.
There's evidence that folks carrying balances
are letting them pile up more and more. The average credit card
debt for Americans who revolve balances has gone up by nearly a
third in five years, from $4,230 in 1995 to $5,610 in 2000, according
to statistics gathered by the Credit Research Center at Georgetown
University and TransUnion.
Buoyed by a booming economy, many Americans
have adopted a "spend now, pay sometime later" philosophy. Industry
analysts call these folks "revolvers."
It doesn't hurt that credit cards are accepted
just about anywhere on the planet.
"Credit cards have become so commonplace and
used in practically every retail business that people say, 'Hey,
why not? I'll just use the card,'" says James Chessen, chief economist
at the American Bankers Association.
The economic good times are making lots and
lots of people say, "Hey, why not?"
"The times have been good for so long. People
are incredibly optimistic. They have this glowing outlook about
their own financial prospects so it makes them willing to take on
these obligations," says Michael Staten, director of the Credit
Research Center at Georgetown University.
"They've certainly become less cautious about
the way they use debt. Optimism will do that."
But much of the card debt in America can't be
attributed to good-time spending. Some Americans reach for credit
cards because they have to -- not because they want to. Credit cards
help them stretch an already strained budget through another month.
Not too many of these people are having "fun."
Down in the valley of
There's evidence that people living paycheck to paycheck are closer
to the edge than ever, saddled by heavy credit card balances that
are creeping higher and higher. Recent rate hikes by the Fed have
made things even worse.
"The rate hikes by the Fed appear to have affected
some consumers on the periphery by increasing the cost of their
monthly debt obligations," Chessen says. "Marginal borrowers are
starting to juggle payments."
So even though the number of delinquent credit
card bills -- bills 30 days or more overdue -- dipped to 2.99 percent
of all accounts in the second quarter of 2000 from 3.28 percent
in the first quarter, there's little to celebrate.
Folks who are behind on bills are struggling
more than ever. Not only has the cost of credit gone up, but credit
card companies are bolstering profits through heavy penalty fees
and aggressive collection practices.
"Credit card issuers tend to be more aggressive
after 30 days in collecting payments," Chessen says. "This is a
Using the system
At the other end of the spectrum are people who've never paid a
dime of interest and who use credit cards for the convenience and
to rack up rewards such as air miles. Industry analysts call these
folks "convenience users." They spend freely with the cards, as
well, but they always have enough money to pay them off.
Some consumers are occasional revolvers. They
typically pay their credit card bills each month but aren't afraid
to carry a balance from time to time so they can buy a big item
that they really want. Once the item is paid off, they go back to
being a convenience user.
But other convenience users slide down into
the revolving debt category because of an accident, illness or loss
of a job.
"You've got people who've gone from being convenience
users to revolvers because of circumstances beyond their control,"
says Robert Manning, author of Credit Card Nation: The Social
Consequences of America's Addiction to Credit.
It can take months, even years, for people to
climb out of debt and get their financial lives back in order. That's
why consumer experts preach the importance of having an emergency
fund -- three to six months living expenses -- stashed away somewhere.
Unexpected setbacks swoop into everyone's life at one time or another.
You might as well be prepared.
Other financial headaches you can see coming.
For example, there's no rule that any of us have to bust our budgets
on holiday gifts. These types of setbacks can be minimized with
some quick planning.
"The bills come in January and February," Chessen
says. "You don't want to wake up with financial frostbite."