Mounting Doubts About Debts

By Barbara Rudolph

Thanks to the free-spending American consumer, the current economic expansion has survived to the relatively ripe old age of three years. Many households have spent all their income, and then some. Americans have confidently, even feverishly, borrowed money in record amounts to buy everything from compact disk players to country houses. The level of home mortgage debt has increased by 37% since December 1982, to $1.5 trillion. At the same time, the total of installment debt, which includes credit-card purchases, department-store credit and the like, has surged by 67%, to $548.7 billion.

But the tide may be turning. Consumers seem to be developing a healthy concern about the debts they have amassed, and are at last restraining their spending. The Department of Commerce last week reported that the economy grew at an anemic .7% rate during the final quarter of last year, a marked decline from the Government's earlier estimate of 1.3%. For the year, the economy expanded at a respectable but far from robust rate of 2.2%.

Many experts are alarmed about the high level of consumer debt. Warns Gilbert Heebner, chief economist for Philadelphia-based CoreStates Financial, a bank holding company: "Debt problems have the potential to retard economic growth and, at worst, lead to another recession." And if a slump comes, many debt-laden families could sink into insolvency. Says Henry Kaufman, chief economist for Wall Street's Salomon Brothers: "American households as a whole have never been more exposed to a downturn."

Average household debt now amounts to 19% of annual disposable income, an all-time high. The outstanding credit balances on the 97 million MasterCards have ballooned from $11 billion to $28 billion since 1983. David Caplovitz, a sociologist at the City University of New York and author of Consumers in Trouble, estimates that between 20 million and 25 million households are financially overextended or "entangled" in debt. Says he: "Within the span of one or two generations, America has been transformed from a cash society to a credit society. People are in over their heads, and it is ruining their lives."

Some experts, though, argue that the level of consumer debt is not a major danger to the economy. Gary Wenglowski, chief economist for Goldman Sachs, a New York investment firm, notes that delinquency rates on consumer loans have not been rising dramatically. Says he: "This suggests that consumers are not having any problem servicing their growing debt."

Despite the credit splurge, the total net worth of American households is on the rise. Economists estimate that it grew by $360 billion in the final quarter of last year; it is expected to increase by an additional $200 billion during the first three months of this year. Main reason: the red-hot stock market. Since September, the Dow Jones industrial average has jumped 39%. The rally creates what economists have dubbed the wealth effect. Many people are richer, at least on paper, and so they feel ready to spend. Last week, though, the market retreated. After rising 16.29 points on Thursday, to hit a record peak of 1804.24, the Dow fell nearly 36 points on Friday, closing the week at 1768.55. Though the market's prolonged rise has fattened pocketbooks, the new wealth is not evenly distributed. No precise studies have been done on the subject, but economists are convinced that stockholders whose investments have greatly risen in value are not the same people who face stacks of unpaid bills. The booming stock market, in short, is not enriching the vast majority of the households that are deeply in debt.

Indeed, many consumers are more strapped than ever. Paul, a Chicago bank employee, makes $34,000 a year, but his wallet is more often bulging with his 15 credit cards than with cash. He has piled up $10,000 in credit-card - balances and consumer loans, and five months ago, he obtained a $128,000 mortgage to buy a town house in Chicago's tony Lincoln Park. His monthly payment: $900. Says Paul: "I'm really living beyond my means, and it's all coming to a grinding halt. I'm making barely enough to get by." Borrowers often imagine that inflation will bail them out of their obligations. That was a reasonable expectation throughout most of the 1970s, when debtors could rely on persistently rising prices to reduce the real value of their liabilities. These days, though, as inflation is running at a modest 3.5% annual pace, such hopes have been dashed.

Debtors often complain that their fall into the credit trap was facilitated by overly aggressive banks and credit-card companies. Says Paul Black, director of research for a national publication, whose debts compelled him to declare personal bankruptcy three years ago: "Banks were literally forcing their credit on me by mail." Luther Gatling, president of New York-based Budget and Credit Counseling Services, concurs. Says he: "Half the blame for the debtors we help should go to the lending institutions." Some banks do not seem to care how many cards a potential customer already has. Cardholders now carry an average of seven cards, according to the Nilson Report, an industry newsletter.

The motivation behind the bankers' credit-card push is no mystery: the business provides handsome profits, mostly as a result of the hefty 18% to 22% interest charges commonly levied on cardholders' outstanding balances. Those rates have remained largely unchanged, even as charges on other consumer loans have been recently pared. At New York City's Manufacturers Hanover Trust, for example, interest rates on some fixed-rate home improvement loans were last week reduced from 14.5% to 13.5%. At Bank of America, rates on home equity loans of between $15,000 and $24,000 were cut this month from 12.75% to 12%. As a result of such declines, most banks are now making more money on their credit cards than on other consumer loans.

Some Congressmen, though, would like to curb the credit-card industry. Two bills have been introduced in the Senate to set a cap on the amount of interest that can be charged to credit-card users. Under current law, cards are regulated by the legislature of the state in which they were issued or in which the cardholder resides. Congress may also require that companies disclose more information when they solicit new customers. Under the provision of one bill, offers would have to state clearly the card's interest rate, annual fee and any potential penalties for late payment.

Moreover, the tax-reform plans that Congress is considering would put limits on the amount of interest that people can deduct on their income-tax returns. At present, the tax system certainly eases the accumulation of debt by allowing taxpayers to subtract all interest from their income. Says Black: "I got into debt partly because the interest payments were the only tax deduction I had. I felt that if I saved money, I'd be losing money."

More and more debtors are deciding that the only way out of their bind is to declare personal bankruptcy. A law that became effective in October 1979 made the process much less onerous than before. No longer, for example, do borrowers have to give up their homes and cars to gain protection from creditors. As a result of the new rules, the number of bankruptcies jumped from 179,112 in 1978 to 523,825 in 1981. While the filings predictably declined after the economic recovery got under way in 1983, they have recently been on the rise again. Last year the number of personal-bankruptcy filings increased about 20%, to 341,189.

A growing number of beleaguered borrowers, though, are trying to dig themselves out of debt without taking the extreme step of filing for bankruptcy. For that reason, business is brisk for credit counselors. The 240 offices of Consumer Credit Counseling Services, a national nonprofit organization, last year advised 127,000 families. Clients now must wait for up to eight weeks before they can meet with a counselor; a year ago, they would have received assistance in less than ten days.

Most credit-counseling services offer extensive financial advice. Says G. Bennett Perry, associate director of Credit Counselors Corp., a Fort Lauderdale-based firm: "We go over the entire budget, from rent to haircuts." Debtors are advised to keep a written record of all their expenditures and to refrain, under any circumstances, from borrowing more money.

For truly compulsive debtors, there is Debtors Anonymous, a ten-year-old national group. Modeled after Alcoholics Anonymous, it encourages debtors to admit that they have been unable to exercise any control over their impulse to spend money. One first piece of advice offered by both credit counselors and D.A.: cut up all credit cards and pay only cash. Reformed Debtor Barbara Aissen, a 49-year-old nurse at Miami Children's Hospital, recalls her own reaction upon hearing this suggestion. Says she: "I didn't have to think about it twice. I said, 'Where's the scissors? I'll slice these cards in half right now.' "

Though most Americans need not destroy their credit cards, more and more people are concerned enough about their debt levels to rein in their spending a bit and borrow money more judiciously. They are starting to realize that credit, like other intoxicating substances, is best used in moderation.

With reporting by Barbara Kraft/ Los Angeles and Frederick Ungeheuer/New York