Published: March 09, 2006 11:42 pm         

Stephanie Salter: Americans using credit cards to pay for basics

For people who pay off their credit cards each month or who never pull a MasterCard or Visa from their wallets, the term “credit card debt” usually conjures up a specific vision: irresponsible spendthrifts charging luxury items that range from expensive designer clothes to tennis ranch vacations.

Recently published evidence suggests the reality is more like groceries, emergency car repairs, medical bills and kids’ tuition.

According to a riveting study by a pair of national not-for-profit, nonpartisan organizations, about one-third of all U.S. households categorized as low-income or middle-income are racking up credit card debt to pay for basic living expenses.

Titled “The Plastic Safety Net: The Reality Behind Debt In America,” the 44-page report is a yearlong, joint effort of Demos and the Center for Responsible Lending. It is based on a national survey that aimed to provide extra dimension to the usual snapshot of Americans’ relationship with the behemoth credit card industry.

As the introduction to the report says:

“The rapid rise in debt among American households over the last decade is well documented, but it’s not well understood … Existing data sources don’t answer basic questions about household credit card debt, including how long the average household has been in debt and what types of purchases led to outstanding balances.”

The answers that emerged from the survey blow up a lot of stereotypes and misconceptions about who runs up credit cards so high they can’t pay them off each month and why they do so.

“Lower-income” and “middle income” are classifications based on an established standard that encompasses households whose incomes fall between 50 percent and 120 percent of their local overall median income.

For many in this economic segment of folks (which includes me and accounts for about half of all U.S. households), the report says, “credit card debt is most aptly described as the new ‘safety net’ for managing essential expenses.”

Some numbers:

--Credit card debt in the United States has just about tripled since 1989. Last year, it reached nearly $800 billion.

--In the past five years alone, during which time Congress made it much harder for individuals (though not corporations) to declare bankruptcy, credit card debt rose 31 percent. In spite of this, credit card issuers are selling their high-priced money as feverishly as ever. In 2004, they sent out more than 5 billion solicitations.

--To participate in the survey, households had to have carried credit card debt for at least the previous three months. Those participants accounted for about 29 percent of all lower- and middle-income households.

The 29 percent sampling represents about 41 million people in 15 million households, the study’s authors say.

Two-thirds of these homes included spouses or partners; 54 percent included children; 78 percent were non-Hispanic Caucasians; 70 percent had some postsecondary education, and just under 70 percent lived in suburban or rural areas.

--The average credit card debt for these households was $8,650, the median — meaning half were higher, half lower — was $5,000. One-third had credit card debt more than $10,000.

--Nearly 60 percent had been carrying the debt for a year or more, with the average length of indebtedness being 43 months. About 47 percent said they had paid down their credit card balances only to have been forced by unforeseen circumstances — not Caribbean vacations — to again rack up debt.

Speaking of those circumstances, as the authors of the report put it:

“What distinguishes low- and middle-income households with relatively high levels of credit card debt from those with lower levels of debt is chance and misfortune.”

Only 12 percent of the households surveyed said they had not incurred credit card debt from having to use their cards for at least one basic living expense. The breakdown:

--33 percent had to use their cards for rent, groceries, utilities; 38 percent for home repairs; 48 percent for car repairs; 34 percent for a major household appliance (such as a busted refrigerator, not a bigger TV); 29 percent because someone had been ill or incurred medical expenses; 33 percent for college or K-12 tuition; 25 percent because they had been laid off or fired.

The survey found that only 10 percent of the indebted households planned in the next three months to pay just the minimum required payments. About 39 percent said they planned to pay a little more than the minimum, 41 percent said it would be two to three times over, and 9 percent said they planned to pay off the entire balance.

Not surprising, the lower a household’s income, the harder it is to get out from under a load of credit card debt. The authors of the report created a “debt-stress” ratio of credit card debt to income, with 21 percent the average. But some folks’ ratio was as high as 100 percent, meaning they owed as much to credit card companies as they earned.

Because black and Hispanic households generally earned less than white ones, they tended to use their cards for basic living expenses at a higher rate than did whites, and their debt-stress ratios were much higher. Renters also tended to incur credit card debt for basic living expenses almost twice as much as homeowners.

However, one of the most harrowing sections of the report examines credit card debt against the phenomenon of record home mortgage refinancing.

Some 30 million Americans refinanced or acquired second mortgages in the three years leading up to last year’s rise in interest rates. This included some 40 percent of the households in the survey. More than half of that group said they used money from their re-fi’s to pay down credit card balances. The average credit card debt paid down: $12,000.

One out of five of these homeowners, within the three-year period of the re-fi, again was carrying credit card debt. The average: $14,000.

The report can be viewed via PDF at www.demos.org/pub654.cfm. A free copy can be ordered by calling Demos at (212) 633-1405. It takes a fair chunk of time to read 44 pages, but, be assured, you won’t be bored.

In addition to the breakdown of credit card debt, the authors provide related context, such as predatory lending tactics that have been allowed to balloon. One late or missed payment to one card company can trigger a “universal default,” bumping that card’s interest rate sky high and damaging the consumer’s overall credit.

The authors also analyze “the eroding safety net,” which they contend has helped force millions of Americans to substitute credit cards for the traditional “rainy day” savings account.

Among other chilling statistics, while wage increases for lower- and middle-income households has grown stagnant over the past two decades — rising just about 5 percent when adjusted for inflation — fixed costs of living (housing, child care, health insurance, taxes) have increased from 53 percent of annual income to 75 percent.

Significantly, the federal government each year dedicates about $335 billion to what it calls “promotion of asset building.” Less than 5 percent of this money goes to the bottom 60 percent of taxpayers.

Stephanie Salter can be reached at (812) 231-4229 or stephanie.salter@tribstar.com