MERCHANTS OF DEBT
The world glitters these days with opportunities to forget the rigors of the winter in a bout of self-indulgence. The theater, opera and ballet seasons are in full swing. Stores are about to burst forth with displays of brightly colored dresses and lightweight suits foretelling the not-quite-imminent spring. Airlines and travel agencies sing siren songs of palm trees bending in soft Caribbean breezes. And all these delights can be savored without dipping into the cash that must be hoarded to pay those monstrous winter fuel bills. Just flash a few rectangles of hard plastic embossed with cabalistic numbers, and enter the magic world of Buy Now, Pay Later.
Provided that, of course, one has survived the Christmas journey into that country without having to exit through the underworld of dunning creditors, debt-consolidation loans and bankruptcy court. Over the past month or so, the morning mail has been reviving unmerry Yuletide recollections in millions of households, as the bills have cascaded in. From department stores for the toys, furs, watches, gowns, cameras, TV games bought with the "holiday money" that the stores sent out in November (how far away that "first payment not due till February" seemed then). From credit-card companies for the drinks so expansively signed for that day the office staff knocked off early to spend the afternoon toasting one another's health. In many households those bills will not be paid for months, during which time the families will have to scrimp. Says A.J. Monjure III, director of Greater New Orleans' Consumer Credit Counseling Service: "Now is when people get in trouble, after the holidays. They just skipped the creditors, and now all of the bills have started coming in."
American Duty. But the vast majority of Americans will clear up their Christmas bills with only minor difficulty and then launch on another round of credit buying--or just never stop. In the modern U.S., the Affluent Society has become the Credit Society, and an insistence on buying only what can be paid for in cash seems as outmoded as a crew cut. Those who cannot get credit are second-class citizens. Those who try to limit their borrowing are sometimes viewed as economic subversives--as TIME'S Johanna McGeary discovered when she confided to a Boston banker that she rarely uses her two department-store charge cards. Wailed the astonished banker: "You're just not doing your part for the American economy."
The banker has a point. Since 1950, while the U.S. population has grown 44%, the total of consumer installment debt outstanding has multiplied more than twelve times, to roughly $179 billion--and that does not include home-mortgage debt. If consumers in any month go into hock less rapidly than they did the month before, economists view their self-denial as a worrisome sign. And if Americans ever start to pay off old debts faster than they take on new ones, unsold merchandise piles up at an alarming rate.
That happened during the 1974-75 recession. But since then economic recovery has prompted a renewed willingness to incur debt--or perhaps the real sequence went the other way around. In any case, installment debt rose 10% in 1976, and Salomon Brothers, a leading Wall Street investment house, predicts that it will shoot up 12% this year. Says Lacy Hunt, a vice president at Phila delphia's Fidelity Bank: "The ability of the consumer to take on more debt will be the underpinning of the economy, in 1977. This year is the year of consumer credit."
Dollar totals, however, are only one way to measure the growth of the Credit Society. To graybeards raised in a cash economy, the proliferation of goods and services that can be bought with credit is even more startling. Houses, cars, furniture, appliances, airline tickets barely begin the list. Rents at the Promenade Apartments in Los Angeles, ski-lift tickets in Aspen, Colo., taxi rides in St. Louis, veterinary services in Jacksonville, and treatment in the emergency rooms of Atlanta's hospitals can all be charged on credit cards. So can admission to a nudist camp in Yugoslavia, birth-control counseling by Planned Parenthood of Pittsburgh and funerals conducted by the Parkside Memorial Chapel in New York City.
Culture, virtue and vice are all available on credit. International Art Registry, an organization that authenticates art works, in the past six months has begun offering an Art Card on which patrons can charge up to half the price of a painting or sculpture, and take as long as five years to pay (at 15% interest). One California civil servant used the card to buy a Maxfield Parrish original that cost $14,000--equal to his annual salary. At Emory University in Atlanta, students can use credit cards to enroll for any evening course--Spanish, fiction writing, belly dancing. Some churches in the same city let parishioners charge their annual pledges on credit cards.
Discreet Billing. In a less hallowed vein, several Las Vegas hotel-casinos issue their own credit cards to customers who visit several times a year. By showing his card, a holder can get a room when the hotel is ostensibly sold out (the card identifies him as a preferred customer entitled to a room the hotel holds in reserve) and then proceed to the casino to pick up chips on credit. Although prostitution used to be the quintessential cash-in-advance business, the Cottontail Ranch, a legal brothel between Las Vegas and Reno, posts signs over each of its beds advertising its willingness to take Diners Club, Master Charge or BankAmericard. Some of New York's "massage parlors" accept credit cards too --discreetly billing customers in the name of nearby restaurants that for a fee let the parlors use their card imprinters and sales-draft forms.
Even people caught in the toils of the law can sometimes escape on credit. Master Charge holders can charge court fines in Erie, Pa., and one holder of a credit card from Citizens and Southern National Bank in Atlanta got a loan to bail himself out of jail. In Bucksport, Me., the law firm of Fellows, Kee & Nesbitt will let clients charge legal fees on BankAmericard or Master Charge ($35 for drawing a simple will; $300 for defending a client against charges of drunken driving). New York lawyer Jerome Meyers even accepts installment payments of his $500 fee for handling the court work to have a debtor declared bankrupt.
Loans for Loans. Credit itself, in a sense, can be bought on credit. Nearly all banks now offer "overdraft" plans that allow a customer to take out a loan simply by writing a check for an amount larger than the cash balance he has in his account. The loan can easily be used to make monthly payments on bills that the customer has run up on the same bank's credit card.
No one really knows how many credit or charge cards are available, but many consumers accumulate 50 or so without trying especially hard. The world's largest known assortment belongs to Walter Cavanagh, 33, a bachelor pharmacist in Los Altos, Calif., who collects credit cards the way other people collect stamps or coins. At last count he had 805 in his own name, plus another 50-odd en route to him and application forms for some 300 more (only J.J. Newberry, the variety-store chain, has ever turned him down). Cavanagh, who earns about $27,000 a year, generally carries and uses only two of his cards, Diners Club and either BankAmericard or Master Charge; he usually keeps the rest of his collection locked away in a bank safe-deposit box. In theory, however, if the credit limitations on all his cards were added up, he could run up bills totaling $9.3 million in a single month at restaurants, stores, hotels, gas stations, car-rental agencies, nurseries, supermarkets.
The sending of credit cards to people who do not ask for them was outlawed by Congress seven years ago; too many thieves were stealing cards out of the mail and happily charging huge purchases in the names of people who had no inkling of what was going on until they got the bills. But banks and other merchants of debt still vigorously advertise services like "loan phones," which can be called at night by borrowers too impatient to wait until the bank opens in the morning. One of the current attractions: car buyers who a year or two ago could borrow for no more than 36 months can now get 48-month loans.
Credit, once considered the privilege of the well-to-do, is being extended to --and snapped up by--more and more lower-income people. Over the past decade, the most explosive growth in the whole credit field has been recorded by the two big bank charge cards, Master Charge and BankAmericard, which will be renamed Visa next week. (The new name will apply to cards that have been issued under different names in 21 countries, and it also subliminally suggests the passport to the good life.)
Master Charge grew from 5.7 million cardholders who charged $312 million worth of purchases in 1967 to 40 million holders--one out of every four adult Americans--who ran up bills of $13.5 billion last year. One major reason: banks deliberately offer the cards to many people who cannot meet the requirements of American Express and Diners Club for a minimum income of $10,000 a year. Chemical Bank in New York City says it "probably" will grant a Master Charge card to a person in his 20s who has been employed for only six months and earns $8,000 a year.
Sudden Impulse. At the other end of the scale, some card companies are establishing a hierarchy among their holders. American Express, besides its familiar green card, issued a gold card to clients who qualify to borrow $2,000 or more on their signatures. By checking a box on his American Express bill, a cardholder gets an instant loan. Carte Blanche has a gold card too; it is good for two years, unlike ordinary cards that have to be renewed annually.
As they get credit, people's buying habits change: on sudden impulse they pick up items they would never have bought if they had to pay cash. Explains Madi Ferencz, a senior product manager for Colgate-Palmolive Co. in New York: "Knowing I can charge an item, I say, 'Oh well, the bill will not be corning in for another month.' " At one auction, Ferencz dipped into her bank line of credit to make the winning bid of $500 for a Persian rug. "I wasn't planning on buying a rug, but this one came up at a fantastic price." A walletful of credit cards also makes many a consumer feel like a big shot who can spend freely at posh restaurants. Says Roger Martin, public relations manager of Windows on the World atop the World Trade Center in Manhattan: "If a person with a card sees a $35 bottle of wine on the list, after one drink he'll decide to buy it. Shoot the works, baby! It's funny money, not green hard cash."
Of course, as all debtors know, they must eventually settle their bills in green hard cash or have their credit cut off --and, as the 17th-century English poet George Herbert observed, "He that has lost his credit is dead to the world." So the U.S. has not quite become the cashless society, but there are some hints of a less than brave new world aborning. For the past three years, a Cornell University faculty dining club has actually forbidden its customers to pay cash. Professors are issued credit cards by the university and must use them in the club or eat somewhere else. The club is run by the Cornell School of Hotel Administration, which apparently wants to train its students for a world in which cash has become nearly obsolete.
About a third of the holders of bank credit cards pay their bills within 25 days and thus escape the interest charges equal to 18% a year that banks levy on cardholders who pay their accounts more slowly. Last May, however, Manhattan's Citibank began imposing a fee of 500 a month on the prompt payers. Bank officials protested that they were losing money handling the quickly settled accounts. Be that as it may, the charge marks a vaguely Orwellian first: customers now have to pay for the privilege of not using extended credit.
Fairly Prudent. For the most part, though, the Credit Society is less Orwellian than Galbraithian: a world of affluence. Since World War II, the U.S. has shifted from being a nation of renters to one in which the majority of all families own their own homes. Auto ownership has become almost universal (84% of all families), enjoyment of TV sets even more so (97% of all families have at least one). None of that would have been possible without easy credit. A cash-on-the-barrelhead economy, if one can still be imagined, would be smaller and poorer, with less production, lower incomes, fewer jobs.
Worries that the economy would prove to be a house of cards built on uncollectible debt have largely disappeared. Gerard Lareau, president of the Consumer Credit Counseling Service of Greater New York, offers some rules of thumb for individuals and families: 10% of take-home pay devoted to meeting installment bills is "comfortable," 15% to 16% "manageable," 20% or more dangerous "credit overload." By these standards, most Americans have been using credit fairly prudently: total installment debt currently is slightly less than 13% of total personal income.
The test came in the 1974-75 recession, when credit delinquencies (bills overdue 30 days or more) rose to 2.8% of all consumer debt. Says Robert Sakowitz, president of Sakowitz Inc., a Houston-based chain of specialty stores: "We probably wrote off more bad debts in 1974 than we ever have in all of our 75 years of existence." As the economy has recovered, the delinquency rate has dropped again to less than 2.4%, which does not worry lenders.
But if consumer debt is no danger to the overall economy, life in the Credit Society still has its strains. Psychologically, puritan maxims--do not enjoy something until you have earned enough to pay for it; stay out of debt--maintain a strong hold on the American mind. In a survey of consumers two years ago, pollsters for General Mills Inc. found that 60% of American families considered "not being in debt" an important personal value; 45% identified "being completely out of debt" as a major goal for the future. And how did they face the fact that they might well never reach that goal? By redefining "debt." To many, the word did not mean simply owing money but falling behind in the payments.
Many people still feel vaguely guilty about using credit heavily--especially, of course, when the bills come. Says Manhattan Psychologist Joyce Brothers: "Credit buying is much like being drunk. The buzz happens immediately, and it gives you a lift, the feeling that you don't care about your problems. The hangover comes the day after."
Socially, the credit card is rapidly replacing the checkbook as a weapon in marital wars. Credit has given each spouse a method of concealing spending from the other until it is too late to do anything about it. Charlottesville, Va., Psychiatrist Richard Garnett says he sees many cases in which a wife runs up huge charge-account bills as a way of getting even with her husband for some real or imagined slight. A husband, of course, can achieve the same result by-.treating himself and some boon companions to frequent three-martini "business" lunches and charging them on his American Express card.
Whether overuse of credit causes marital strife, or vice versa, the combination often leads to a sequence well known to bill collectors and lawyers: debt defaults, followed by divorce, followed by bankruptcy. Oddly, say credit people, it rarely works the other way around; if a debt-ridden couple can patch up the marital quarrel, they usually can work out a way to clear up bills and return to solvency too. In other words, the family that pays together, stays together.
Real Victims. Financially, the Credit Society has its outcasts and victims. For all the vigor with which lenders push credit, some people find they cannot get any. Janet Brooks, 30, paid cash for all her major purchases for her first nine years after graduating from Wayne State University in Detroit because she feared she lacked the self-discipline to handle credit. Now, as co-owner of a recently founded catering business, she needs credit; the business cannot borrow unless Miss Brooks and her partner, another single woman, prove their personal creditworthiness. Says Janet: "I've tried Master Charge, Carte Blanche, Diners Club, local stores, you name it. I walk into a store and apply for a charge account; I get back a notice that my credit has been refused because I have no credit history."
The real victims of the credit system are those who plunge into debt over their heads. By most estimates they constitute no more than 5% of all credit buyers, but their numbers seem to be growing. Only a handful are true "crediholics"--people who get some kind of excitement about always being in debt and in a bind about paying bills. Most simply yield to the temptation to overspend.
The temptation-prone come from all income levels. One client of New York's Community Credit Counseling Service made $80,000 a year as a brokerage-house partner and counted on receiving a $300,000 inheritance, so he ran up bills of more than $150,000. Still waiting for the inheritance, he is now spending almost half his income to pay off under an extended plan at $3,100 a month. In Los Angeles, Kenneth Breckenridge, 42, a mail sorter, and his wife Genevieve, a teacher in the Head Start program, found themselves paying $1,178 of their combined $1,450 monthly income to clear up credit bills. Says Breckenridge: "I found credit hard to resist even when I didn't need it. Beneficial Finance would send me something in the mail saying, 'You're good for $500 right now.' You didn't even have to go to the office, just sign the card and send it in. I went to Vegas on one of our anniversaries like that."
The common denominator of debtors in trouble is a kind of economic il literacy. Some live up to the limit of incomes that are suddenly reduced by layoffs or illness. Many ignore the extent to which inflation is reducing their ability to charge luxuries by raising the price of necessities. Most delinquent debtors never even add up what they owe until they are forced to, and then they are stunned by the totals. When Kevin White, 33, a fireman, and his wife Sharon, 30, a dental assistant, turned to the Consumer Credit Counseling Service of Greater New York in 1975, Sharon thought they owed about $5,000 to $8,000; Kevin guessed $8,000 to $10,000. The actual total: $13,900.
Delinquents can get a debt-consolidation loan from a bank or finance company, but credit counselors generally advise against it. True, the debtor will reduce his monthly bills, since he will usually be replacing several short-term loans with a single longer-term debt. But, says New York's Gerard Lareau, "what happens is that the debtor will have one monthly payment of $150 or so instead of the $250 he paid before. He'll think he has $100 a month more to spend and he'll start using his credit cards again."
A better alternative is to turn to one of the 170-odd nonprofit community credit counseling services. The services make the debtor sign an agreement to take on no more credit and to hand over all his charge cards. Often a counselor will scissor the cards to pieces before the debtor's eyes. The service then negotiates extended repayment of the loans and collects a fixed monthly payment from the debtor that it parcels out among the creditors.
Bankruptcy Pain. Though such services do enable debtors to clear up their bills, the process is very far from painless. Delinquent debtors suffer a sharp reduction in their standard of living and a shame so severe that many do not want their names used. An example is an Atlanta father of four who is struggling to pay off a debt of $23,700, most of which he charged while he had a $20,000-a-year job in the marketing division of Lockheed. Laid off in 1972, he now earns $12,000 annually in the management training division of Georgia Power Co. He has been forced to moonlight by teaching part time at a community college, and to make his eldest son pay $135 a month toward the groceries. Says the debtor: "It took time for the kids to understand that we couldn't charge things. My wife was resentful because I was the one who had been managing the accounts. Not being able to pay bills affected her physically and mentally; she didn't want to face friends. We eat a lot of hot dogs, and I haven't had a new suit for two years."
The end of the line for overburdened debtors is bankruptcy court. In fiscal 1976, which ended June 30, the Supreme Court counted 211,348 U.S. personal bankruptcies--slightly less than the year before, but up 25% from 1974. One reason for the rise: bankruptcy is losing its old stigma in the Credit Society. Some consumer advocates actually promote bankruptcy as a way for debt-harried people to get a fresh start.
Bankruptcy comes in two varieties. The milder is a proceeding under Chapter 13 of the federal Bankruptcy Act in which a federal district court acts rather like a consumer counseling service. It fixes a monthly amount that the debtor can pay, collects that sum and parcels it out among creditors according to an extended repayment plan. Straight bankruptcy is a more drastic proceeding: a court-appointed trustee takes charge of the debtor's assets, subject to certain exemptions, sells them and distributes the money among creditors.
Only the Clothes. This procedure has one big advantage for the bankrupt: any debts that cannot be paid are simply wiped out. It also has a huge drawback: states set the rules governing how much property a bankrupt can hold on to, and they vary wildly. California allows a bankrupt to keep a house in which the debtor has an equity of $30,000 or less. Thus, a bankrupt could keep an $80,000 house on which he had a $50,000 mortgage (though he would have to keep up the payments). Texas with rare exceptions permits a bankrupt to hold on to a car and house of any value. New Jersey, on the other hand, forces the sale of all bankrupts' houses, and will let a debtor hang on to only $ 1,000 worth of furniture and clothing.
Once a debtor has declared bankruptcy, he cannot do so again for six years. So lenders frequently offer new credit to a bankrupt, knowing that their bills cannot be canceled again soon. Last December David and Sally Resnick of Des Plaines, Ill., filed for a straight bankruptcy; before their case could even be heard, a department store to which they owed several hundred dollars that will never be paid sent them a shiny new charge card.
Besides defaulted debtors, the Credit Society has many other discontented citizens: people who cannot understand the terms of a time-payment contract; buyers infuriated by billing errors; consumers, especially women, who believe they have been denied credit for capricious reasons. Ironically, by making credit seem essential to comfortable living, lenders have sharpened the grievances of all these groups enough to make them a potent political force. Responding to their gripes, Congress in the past nine years has enacted five laws to strengthen the hand of debtors in dealing with creditors, and it will consider some tough new legislation this session.
Among the requirements of the recent laws: creditors must spell out interest, financing and other charges. A department store, for example, must inform buyers that the interest charge of l 1/2% a month on the unpaid balance in a revolving-credit account amounts to 18% a year. Debtors may withhold payment of a bill they believe to be incorrect, and the creditor must explain the billing within 90 days. A credit cardholder is liable for only $50 in purchases that someone else charges on a lost or stolen card. If a merchant or lender turns down an application for credit, he must say why. People may not be denied credit because of sex, race or national origin. A bank, finance company or other lender that buys an installment contract from a merchant--in legal parlance, a "holder in due course"--may not demand payment for defective goods that the merchant refuses to repair or replace.
The most important legislative push this year will be an effort to police collection agencies. A bill to place them under federal regulation passed the House last year but died in committee in the Senate. It will be revived this year. It is a needed piece of legislation; the practices of some bill collectors are still outrageous.
Collectors protest that the majority of them operate ethically, and anyway they are subject to increasingly stringent state laws that have driven many strong-arm operators out of business. By one estimate, the number of collection agencies in the U.S. has been cut by 20% in the past decade, to 5,000 now. Florida, Georgia and Texas do not even allow the attachment of wages.
Yet debtors and state regulators still tell harrowing tales of incessant phone calls, visits to employers, collection notices deliberately made up to look like court documents. A particularly vicious ploy, reported from a Florida legal aid attorney: a woman is warned by a neighbor that she had better rush to the emergency room of a local hospital, because her child has had an accident. She is met at the hospital's entrance, not by a doctor but by a bill collector who had phoned the neighbor. He tells her that no accident has occurred--but now, about that overdue payment...
Though federal regulation should help to end these remaining abuses, passing laws in general is not a full answer to credit problems. Credit counselors assert that much of the legislation of recent years has been ineffective because most consumers do not know their rights under the laws. That points to a broader problem. Borrowers in general are appallingly ignorant of the basic economics of credit. Says Boston Debt Counselor Mel Stiller: "People are not taught in school how to use credit and how to do family financial planning. They just never learn how to survive in modern economics."
Sample Budgets. As an example of what could be done, many educators point to a "Contemporary Family Life" course originated by Cliff Allen, 38, at Parkrose High School in Portland, Ore. Students pair off in simulated marriages and draw up sample family budgets. Among other things, says Allen, a former football coach, "we have the kids simulate buying a number of things on credit, ranging from household furniture and appliances to a car to the house itself. But before they purchase the items, we have them do an analysis of the different forms of credit." One result: those students who are planning real marriages soon "get depressed and even belligerent" as they learn the costs of fulfilling their dreams.
It is a blow to romance, perhaps, but a valuable lesson in reality. On balance, the advantages of widespread easy credit far outweigh its drawbacks: materially, in the form of a richer society; psychologically, in the ability to satisfy impulse and indulge expansive moods. Consumers do need some further legal protection against credit abuses, and they need much more counseling in the techniques and costs of borrowing. But in the end, no one can protect the crediholic from himself. Hedonistic though it is, the Credit Society reserves its greatest rewards for those who practice that most puritan virtue: selfdiscipline.
This file is automatically generated by a robot program, so viewer discretion is required.