Easy Credit Fuels Consumer Debt : Installment Buying Is Outpacing the Economy Itself

WASHINGTON —  For Chris G., sliding into debt--$25,000 worth of debt--was, unfortunately, all too easy.

The unsolicited credit cards that kept coming in the mail permitted Chris to maintain the style of living that she and her husband had grown accustomed to before she quit her $25,000 a year job six years ago to raise the first of her two children.

“At the beginning I had only four credit cards--a Visa, a MasterCard and two store cards,” recalled the Silver Spring, Md., woman, who agreed to talk on the condition that her identity not be disclosed.

Then, thanks to her previous good credit history, the unsolicited credit cards began pouring in. “They just rolled in,” she said. “If you’re a credit card addict like I am, you use them. In the end, I had five Visa cards from different banks that sent them to me to use free.”

Easy to Rationalize

With thousands of dollars of credit available from each card, “we just kept borrowing and borrowing and borrowing to live. I always had reasons: We needed snow tires; the boys needed pajamas; the Christmas Wishbook had arrived from Sears.”

Besides, she added, it was easy to rationalize the borrowing. “I figured I could always deduct the finance charges from my income tax.”

In the end, though, the borrowing “got us in a real hole.” Finally, she and her husband--who did not know the extent of the debt until last summer--visited a credit counselor. They have now put themselves on an excruciatingly tight budget to permit them to repay all of their debts within five years. As for the credit cards that got them into trouble, “we had a burning ceremony. Now I pay cash for everything.”

Chris’ tale of woe may be extreme, but her basic problem with credit is by no means unique. With a growing number of lenders eagerly dishing out the credit, thousands of Americans are acquiring debt almost as naturally as they turn on a television set.

From traditional automobile loans to credit cards to new lines of credit that are linked to the value of their homes, consumers have been taking on debt at a pace unmatched since the end of the Korean War.

Today, according to figures from the Federal Reserve System, Americans have tallied up $664.2 billion of debt for loans--car, property improvement, home equity, mobile home, recreational vehicles and personal loans. That sum is more than triple the $223.2 billion rung up in consumer loans 10 years ago.

For home mortgages, there is another $1.4 trillion of credit outstanding--also nearly three times the $483 billion outstanding 10 years ago.

Consumer debt has grown faster than consumer income and faster than the economy itself. While most economists had, as a result, expected consumer borrowing to slow down last year, it continued to rise sharply, growing at an annual rate of 21% in the first half of 1985 and 18.8% in the third quarter. Over the last three decades, the normal annual growth rate has been about 13%.

The greatest growth in credit has come in the use of bank cards as financial institution aggressively pursue consumers, mailing unsolicited bank cards across the country to attract new customers. Between Dec. 31, 1983, and Oct. 31, 1985, bank credit card debt rose from $44.2 billion to $73.7 billion--a 67% increase in less than two years.

Less Than Government

Even so, most economists do not believe that the current high level of consumer debt poses a threat to the economy as a whole, particularly when it is compared to all of the different types of debt being incurred by various segments of the country.

“What consumers are doing on their balance sheet is considerably less than what the government is doing on its balance sheet or business is doing,” noted Charlene Sullivan, associate director of Purdue University’s Credit Research Center.

What’s more, households appear in better condition to repay their debt than in the past. For even as they borrow, they are increasing their liquid assets--checking and savings accounts, stock, money-market funds, bonds and other financial instruments that can be readily converted into cash, according to Daniel Van Dyke, a vice president and senior economist for Bank of America. Five years ago, installment debt accounted for 10.9% of consumer liquid assets. Today, that ratio is 9.9%. “Installment debt has grown fast, but assets have grown faster,” Van Dyke said.

But, by some of the measures that economists use to determine whether consumers are in debt over their heads, households would appear to be in trouble. Consumer debt--excluding mortgages--is equivalent to 19.2 cents of every dollar of spendable income. That compares to 17.8 cents at the end of 1979--the peak of the previous recession.

Higher Than Last Year

Delinquency rates on credit payments are also rising, with 2.39% of all consumer installment loans (excluding bank card loans and mortgages) more than 30 days late as of Sept. 30, 1985, the last available figures. Although that level is below the record 2.91% delinquency rate posted 11 years ago, it is higher than the 2.1% recorded a year earlier.

Delinquencies on bank card loans, however, are near their all-time high, with 2.88% of all the payments for such loans more than 30 days late at the end of September. Although that may sound like a small number, economists point out that it is up sharply from the 2.1% delinquency rate recorded for a year earlier.

Mortgage loan delinquencies, meanwhile, have declined somewhat since January, 1985, when they were at a record high--6.19%--for the last five years. At the end of September, those rates had dropped to 5.64%.

Credit counselors don’t need to see these figures to know that a growing number of families are overextended: They know simply by the sharp increase in the number of clients that are turning to them for help.

“We’re definitely seeing a marked increase in the number of clients,” said Joanne Kerstetter, executive director of the Consumer Credit Counseling and Educational Service of Greater Washington. “Our waiting list this year is about four weeks; it used to be only a week and a half a year ago. For the first six months of 1985, the number of families we saw increased by 25%.”

What’s more, their debts were far higher than previous clients. “The debt load, excluding secured debt such as loans for homes or cars, averaged $7,000 this year; last year it was less than $5,000,” Kerstetter calculated.

Contributing sharply to the increased debt load was the average number of credit cards each family carried--from four to five last year to seven to nine this year, Kerstetter said.

This rapid expansion of consumer debt is causing increasing concern among many economists who fear that the overextended consumer soon will have to put a brake on spending. That in turn, could lead to a sharp slowdown in the economy, which for the past year has been spurred on by consumer spending.

“Since the fourth quarter of 1982, consumer spending has been a major driving force in U.S. economic growth,” Allen Sinai of Shearson Lehman Bros. said. “Can the consumer keep it up? Likely not, with the odds favoring a substantial slowdown, but no collapse, in consumer spending during the fourth quarter of 1985 and in 1986,” he added.

With every other sector of the economy weak, that could spell trouble, said Sandra Shaber, vice president of consumer economics for Chase Econometrics.

But Shaber and many other economists point out that the sharp growth in consumer credit numbers may be misleading because the numbers include credit card charges that are made primarily as a convenience rather than for a loan.