Already in debt to three credit cards, Keith Byrum was still tempted. The new card offer in his mailbox - with a $2,500 credit limit - was enough to buy a $2,000 ski boat.
It was the start of summer. The lakes near Clovis, Calif., where Mr. Byrum lives, beckoned. He took the card and bought the boat.
"That was before I knew better," he says now. A few other "dumb purchases" and Byrum found himself with nearly $6,000 in debts and in financial trouble.
There are a lot of Keith Byrums in the United States with relatively hefty - and expensive - credit-card balances. Since 1990, the average credit-card debt per household has doubled to nearly $2,500.
Though Byrum didn't, some consumers give up on repaying their debts. Last year, a record 1.13 million individuals filed for personal bankruptcy, up 28.6 percent from 1995. Ten years ago, only 450,000 consumers filed for bankruptcy.
The trend has credit-card companies, banks, and Congress concerned. A Senate subcommittee is holding a hearing today on "the crisis in consumer credit." A House subcommittee will explore the issue of rising bankruptcies next Wednesday. Some economists hold that a combination of higher interest rates and a stock market decline with a slower economy and higher unemployment could mean trouble ahead if consumers put a brake on their spending.
"It is probable that in 1997 or 1998 we are going to have some pretty significant problems," says David Levy, an economist at Bard College, Mt. Kisco, N.Y. But, he adds, the damage may not be so severe as to cause a recession.
Byrum's spending behavior demonstrates just what economists suspect could happen broadly. "Coming to my senses," as Byrum puts it, he decided two years ago to buy only what he needed and start repaying debts.
"It has been hard," says Byrum, who works two part-time jobs, one with his mother's accounting service, the other doing computer maintenance, market research, and programming. "You see things on sale you really want. And I can't buy them."
Byrum now has his debts down to $800 and counts on paying this off over the next two or three paychecks. His next goal: build a savings account.
Other credit-card holders may be taking similar steps. Statistics released Monday show that consumer borrowing in February rose by $6.7 billion, or a 6.7 percent seasonally adjusted annual rate. Though that remains a brisk increase, it is slower than the 10.3 percent jump in January.
"The sharp increase in debt burdens in recent years may ... be constraining spending by some families," Federal Reserve chairman Alan Greenspan told Congress last month.
He noted that lower-income families are piling up proportionately higher debts than those with annual incomes of more than $50,000. "These families are probably the most vulnerable to disruptions in income," he said.
Nearly 1 in every 3 families whose household income is below $10,000 now has credit-card obligations that exceed 40 percent of its income, notes David Wyss, a financial economist for DRI/McGraw-Hill, a consulting firm in Lexington, Mass.
"By extending too much credit to Americans who will have the most difficulty paying it back, banks are forgetting the basic principles of banking," he holds.
Low-income individuals are increasing their credit-card usage faster than those with higher incomes. Mr. Wyss says the "relaxed lending standards are actually a disservice" to these low-income households. He notes that the default rate on consumer debt jumped by more than 40 percent last year alone. "If this trend continues, banks will be forced to reevaluate loan loss reserves, and ultimately it could have a profound economic impact," he says.
Bank officials often talk of the "democratization" of credit - that is, its availability to many more Americans than in the past.
But that view is changing. More than half of the largest US banks report they are tightening standards for credit-card loans.
Faced with burdensome debts, those in default on their cards are increasingly turning to the bankruptcy courts for relief.
Bankruptcy nowadays is not viewed by many as so shameful, notes Mr. Levy. Many bankruptcy lawyers are promoting their services heavily.
To counter the trend, says Jean Ryan, a bankruptcy lawyer in Miami, some credit-card companies have charged hundreds of debtors filing for bankruptcy, particularly those not represented by a lawyer, with fraud - that is, using their credit cards knowing they didn't have the ability to repay the debt.
The credit-card company then tells the individual that it will likely cost them several thousand dollars to hire a lawyer to defend themselves against the charge. If the debtor will reaffirm some portion of the debt - say $1,000 or $2,000 - the company will drop the legal action. Even after the bankruptcy proceeding has been completed, the debtor still "owes" a portion of the credit-card debt.
But a variation on that practice is being challenged in court. On Wednesday, a US Bankruptcy Court judge in Boston told Sears that it may face sanctions of more than $1.36 million for pressuring customers - by threatening to repossess items bought on Sears, Roebuck & Co. credit cards - to pay their bills even after the customer had declared bankruptcy.
The credit-card industry is also trying to limit its losses by securing a change in the federal bankruptcy law. To reduce the numbers filing for bankruptcy in the courts, it wants debtors to be required to take an initial test before a hearing.