WASHINGTON - The numbers say it all: the average number of credit card debts in U.S. households is nearly triple what it was 10 years ago (see chart on page 18.) "The typical consumer who applies for a credit card doesn't intend to carry a balance, or if they do they think it will be minimal or an infrequent occurrence," says CUNA Chief Economist Bill Hampel. "As a result, they don't pay attention to the interest rate and then they wind up carrying balances that exceed what they expected." Hampel refers to this as the "money illusion." In truth, says Hampel, two-thirds of credit card-holding households carry a balance on their accounts. What's more, he said, they tend to treat one card as a debt management device and keep a balance on the credit card with the lowest interest rate, while running up and paying off transactions on another credit card they treat as a transaction management device. According to CUNA's 1998 member survey, the average number of credit cards (MasterCard, Visa, Discover and American Express) per household for credit union members was 2.5; for non-member household, the average number was 1.5 credit cards. The situation is exacerbated by how differently credit card companies and consumers treat a credit card: when a consumer applies for a credit card, the card company considers they're applying for a loan. When a consumer applies for a credit card, they're thinking in terms of a transaction device, and this perception is encouraged by the credit card companies. Hampel cites credit card companies' affinity marketing and rewards marketing programs that distribute the merchant's discount back to the card holder as an example of this trend. By tying credit card usage to perks like frequent flyer benefits and rebate plans, the (credit) card companies encourage consumers to run up their credit card balances. The sheer number of credit cards per household is not the only issue, posits John McKechnie, vice president, legislative affairs for CUNA, because "responsible borrowers will continue to be responsible no matter how many credit cards they have or how they borrow. "On the other hand, the consumer who's less responsible will continue to use bankruptcy as a financial planning tool, no matter what kind of debt is incurred," McKechnie added. The good news, said Hampel, is that even the credit card lenders are behind some form of bankruptcy reform because of the ease of declaring Chapter 7 or Chapter 13 bankruptcy. The irony is one of the reasons for the rise in bankruptcy filings over the past 15 years is easier access by consumers to credit cards. Rather than miss a payment on a secured loan such as a mortgage or a car, consumers are more likely to run up debt on their credit cards. "The credit card becomes their lifeline before they go under," said Hampel. "The problem is it's only a temporary solution." While credit unions' total loan portfolios have increased 12% from 1998 to 1999, credit card balances outstanding only grew 5%, CUNA reports. Moreover: * In 1998, 189,000 members declared Chapter 7 bankruptcy and 59,000 declared Chapter 13; * In 1999, 162,000 members declared Chapter 7 and 55,000 declared Chapter 13 bankruptcy; Consumer debt and bankruptcy figures are being interpreted in the eye of the beholder, McKechnie warned. On one side are opponents of bankruptcy legislation who've accused the credit card companies of preying on consumers and flooding them with credit card offers. On the other side are bankruptcy legislation proponents who argue that the real enemy are consumers who abuse their borrowing powers. "The bankruptcy issue is a mature debate," said McKechnie. "Lines have been drawn, now it's down to give and take." McKechnie also cautioned that bankruptcy legislation is not as cut-and-dry as some suggest. There are even some legislators on Capitol Hill who've admitted that if credit card companies are not allowed to offer credit cards in certain low income areas, they stand the chance of being accused of redlining. "There's a lot of gray area," he remarked. Despite the unresolved issues, McKechnie remains optimistic Congress will pass bankruptcy legislation this session, and that even though the Senate is weighed down with "procedural morass"-minimum wage and tax cut bills attached to the bankruptcy measure-a solution is in sight. He expects the bankruptcy will to get to conference within the next two weeks. -
ekingoff@cutimes.com
