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

January 20, 1986|CAROLINE E. MAYER and JAMES L. ROWE | The Washington Post

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

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