Our Love Affair with Credit
Unfortunately, it's a freedom many people don't know. Even though most Americans appear to be handling their debt just fine, a significant—and growing—number of people are in serious trouble. Consumer bankruptcy filings have more than doubled since 1990, as shown in Table 3.2.
| Year | Total Nonbusiness Filings |
|---|---|
| 1990 | 718,107 |
| 1991 | 872,438 |
| 1992 | 900,874 |
| 1993 | 812,898 |
| 1994 | 780,455 |
| 1995 | 874,642 |
| 1996 | 1,124,286 |
| 1997 | 1,349,510 |
| 1998 | 1,405,695 |
| 1999 | 1,281,360 |
| 2000 | 1,217,628 |
| 2001 | 1,451,789 |
| 2002 | 1,566,358 |
| 2003 | 1,624,677 |
| 2004 | 1,563,145 |
Many condemn this trend as a symptom of a “live for today” ethic or on baby boomers who never learned the meaning of delayed gratification.
The truth is a little more complicated.
Many consumer bankruptcies are precipitated by medical bills. That's not surprising, given that 45 million Americans are uninsured, and others face hefty copayments and caps on their coverage as employers struggle to contain burgeoning health-care costs. One study at Harvard University suggests that as many as half of all consumer bankruptcies are caused by medical bills.
Lack of savings and significant credit card debt are other factors that can tip a family over the edge into bankruptcy, particularly when they face a financial setback, like a job loss or divorce.
People also can get into trouble when they use their personal credit to launch or maintain a small business. One out of three new businesses fail within five years, according to the Small Business Administration, and many take their owners' credit with them.
Floating a Business on Your Credit CardsSo many small businesses are launched on personal credit cards that a few cautionary words are in order. That's because people who would never think of carrying a balance for “frivolous” personal spending often will max out their cards trying to keep their business afloat. They may view their money-losing enterprise the way a parent views a sick child: They'll do anything necessary to keep the loved one alive. But businesses aren't children, and people who can't make sensible decisions about their companies may find themselves in bankruptcy court. Take Dee. She launched her restaurant with a small pile of cash, a few credit cards, and a lot of hope. She was prepared for the business not to break even right away—perhaps too prepared. The location she picked didn't turn out to be as terrific as she thought. Her expenses mounted much faster than she expected. She needed every dollar she earned, and then some, to buy supplies and pay her employees. Pretty soon her cards were maxed out, and she couldn't even pay the minimums. She filed for personal bankruptcy. She refused to shut down her business, however. She was convinced that with a little more advertising and a little more time, she could make her restaurant viable. She started borrowing money from friends, family, and even the business's landlord. She fell behind with tax payments to the IRS and to her state. Her checks to suppliers started bouncing so often that one by one they refused to deal with her at all. One morning she couldn't open the restaurant because there wasn't enough food to serve. Once it was all over, Dee confessed, “I was like a junkie looking for the next fix. Anywhere I could get money to borrow, I would. I just didn't want it to fail.” It was an expensive lesson. Dee's personal credit has been trashed. The bounced checks mean she's pretty much blacklisted from having a checking account for five years. Her retirement funds are drained, and she owes more than $14,000 to various people and the government. I don't want you to abandon your plans to be an entrepreneur. But go into business with your eyes open. Here are some thoughts:
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The explosion of available credit has had a profound affect on who has debt and how much they carry. For years, credit card issuers and other lenders were pretty cautious about how much credit they would extend, and to whom. It wasn't until the U.S. Supreme Court essentially nullified state caps on interest rates in 1978 and Fair Isaac introduced its first credit bureau-based score in the mid-1980s, that card issuers got more confident that they could properly manage the risks involved in extending more credit to a wider group of people. Now that they could charge essentially any rate they wanted, the credit card companies figured they could take on riskier clients—and make them pay proportionately for the greater chance of default they presented.
Table 3.3 shows how credit card charging soared in the 1990s and beyond.
| Year | Credit Card Charges | Growth |
|---|---|---|
| 1990 | $172.6 billion | 18% |
| 1991 | $188.8 billion | 9% |
| 1992 | $201.8 billion | 7% |
| 1993 | $232.3 billion | 15% |
| 1994 | $285.5 billion | 23% |
| 1995 | $358.1 billion | 25% |
| 1996 | $411.6 billion | 15% |
| 1997 | $443.7 billion | 8% |
| 1998 | $454.3 billion | 2% |
| 1999 | $490.1 billion | 8% |
| 2000 | $568.5 billion | 16% |
| 2001 | $607.7 billion | 7% |
| 2002 | $660.9 billion | 9% |
| 2003 | $683.4 billion | 3% |
| Source: CardWeb.com | ||
This explosion in credit affected everyone—not just the baby boomers. More than 80% of college students these days have credit cards, and they graduate with an average of $2,000 in credit card debt, on top of nearly $20,000 in student loans.
Credit troubles are affecting older Americans as well. As a matter of fact, people over 65 were the fastest-growing group of bankruptcies in the 1990s, as shown in Table 3.4.
| Age | 1991 | 2001 | Change |
|---|---|---|---|
| Under 25 | 98,974 | 94,717 | –4% |
| 25–34 | 417,510 | 464,647 | 11% |
| 35–44 | 348,115 | 602,254 | 73% |
| 45–54 | 179,745 | 414,608 | 131% |
| 55–64 | 69,395 | 128,671 | 85% |
| 65+ | 23,890 | 82,207 | 244% |
| Source: Consumer Bankruptcy Project | |||
So it's not just the young and naïve or baby boomer spendthrifts. Credit problems can afflict people at any age.