Under the Crush of Debt

Article C4 REPRINTED WITH PERMISSION OF THE DALLAS MORNING NEWS. Under The Crush Of debt Families, firms and the federal government all feel the weight of excesses Consumers strapped by credit obligations face limited options By Anuradha Raghunathan Staff Writer. Published March 14, 2004 Bryan Haas, a Dallas sales executive, is worried. He's carrying nearly $20,000 in credit card debt and about $190,000 in mortgage debt . "I am very uncomfortable about my credit card debt ," said Mr. Haas, 31. He and his wife, Natasha, make nearly $6,000 a month. "We aren't bad managers of our money. We realize what's coming in and roughly what's going out. But we just couldn't get ahead of the curve." Mr. Haas has entered a debt management program with the Consumer Credit Counseling Service of Greater Dallas. The interest rates on his six credit cards are frozen. With his monthly regular payments, he hopes to be out of debt in two years. But that's because the interest rates he pays are low. Mr. Haas says he couldn't dream of escaping the debt cycle if he had to deal with spiking interest rates. He's not alone. Many consumers weighed down by debt loads don't have the flexibility in their budgets to face increased payments. Interest rates are at four-decade lows, thanks to the Federal Reserve's policy to stimulate the economy. But with the economy surging in most areas, the Fed may feel pressure to start raising rates this year, experts say, to keep the economy from growing too fast and sparking inflation. Such an increase would only push up credit card rates, making it more difficult for Americans to pay off their nearly $745 billion in credit card debt . Middle-income people would feel even more pinched, and many low-income consumers would be forced into bankruptcy. Some economists are worried about a combination of factors today: Household debt is at an all-time high at $9.4 trillion, personal savings is at an all-time low of about 2 percent of after-tax personal income, and foreclosures and delinquencies are up. Throwing a rate increase into that mix will cause more damage, they say. "Rising interest rates won't short-circuit the economic expansion," said Mark Zandi, chief economist at Economy.com, which provides economic and financial research. "But there are significant parts of our economy which will be hurt very badly. It'll be particularly hard on lower-income households." If rates rise ... An increase in rates would affect different types of debt differently. First off, a change in the Fed's short-term interest rates would affect adjustable-rate mortgages, credit cards and home equity lines of credit. Economy.com estimates that the interest rates on about 20 percent of all household debt adjust with the Fed's rates. But rates may not rise dramatically, and an increase of, say, a quarter-point wouldn't be all that significant. Consumers with fixed-rate mortgages that are locked in for 20 or 30 years won't feel much of a change. Nor will those with fixed-rate auto loans. "If you look at consumer debt , 70 percent is mortgage debt ," said Sung Won Sohn, chief economic officer at Wells Fargo Bank. "There's a hard asset supporting the debt ." He argues that mortgage debt - even though it was at an all-time high of $6.7 trillion as of the third quarter of 2003 - shouldn't pose a problem. Adding stress But many other stress factors are at play. Overall household debt hit a peak of $9.4 trillion in the fourth quarter of 2003. The worrisome portion is credit card debt , which is at a high of $745 billion. Credit card delinquency rates are also high, at 2.68 percent of cardholders nationwide and 3.1 percent for the Dallas-Fort Worth area in 2003, according to Equifax and Economy.com. The catch with credit cards is that if consumers stumble on even a single payment, the rates can go to punitive levels - 18 percent or more - making the payoffs a nightmare. Also, many credit cards are tied to short-term interest rates, and if the prime rate changes, the interest rate could go up in three to six months. That wouldn't be good news for the millions of consumers struggling with debt . Some are already going under. Jacqueline Sala, a 35-year-old single mother in Dallas, has no job and owes nearly $6,000 on her credit card. Unable to make any payments now, she is facing a collection agency. "Honestly, I am going to file for bankruptcy," said Ms. Sala, who is supporting four children with unemployment benefits. Experts say that when interest rates tick up, more distressed consumers will surface. Bankruptcies - both nationwide and in the Dallas-Fort Worth area - have reached historic highs. Nationwide, the total number of personal bankruptcies filed in 2003 added up to 1.6 million - a record high in any calendar year, according to the Administrative Office of the U.S. Courts. Meanwhile, credit counseling agencies say the number of clients they see on a regular basis has leaped. But Fed Chairman Alan Greenspan has maintained that consumer debt is manageable. "The household sector seems to be in good shape," he told the Credit Union National Association recently. "During the past two years, debt service ratios have been stable." But a local consumer credit counseling agency begs to differ. "When I look at the number of debt management companies and the rapid increase, it tells me that Mr. Greenspan is not living in the same world that I am in," said Bettye Banks, senior vice president for education at Consumer Credit Counseling Service of Greater Dallas. "If most people are managing their debt well, why have we seen such an increase in debt management services?" Dangers to seniors Seniors who live on fixed incomes may be the most susceptible to rate changes. Sybil Marchant, 84, said she uses four credit cards to pay for her monthly necessities. "I don't have the cash," said Ms. Marchant, who tries to live on $736 from Social Security each month. She said she has rung up nearly $2,500 in credit card debt in the last three years. She is trying to pay at least twice the minimum payment to bring down the balance, but she isn't sure what would happen if her card rates went up. Many seniors are in the same predicament. A recent study by Demos, a nonprofit public policy organization, found that one in five middle- to low-income seniors spent more than 40 percent of their fixed incomes on debt payments. They will all have to figure out ways to come up with the extra money to for the payments if rates rise. "As interest rates rise, we're going to see more and more people succumb to financial ruin," said Tamara Draut, director of the economic opportunity program at Demos. Experts say consumers would be able to weather the debt burden if they had more savings. But the personal savings rate has dropped from a high of about 8 percent in 1992 to 2 percent in 2003. "People don't have a cushion to fall back on," said Samuel Gerdano, executive director of the American bankruptcy Institute. "If some households have an uninsured medical expense or the loss of a second income, it can lead to a situation where they need to think about bankruptcy. As long as you have this overhang of debt , any uptick in rates will make it difficult for individuals to meet their obligations."
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