'Tis season for credit-card debt

Shoppers used more plastic this holiday, paying for everything from Web

When Tamasha Crouse arrived in the offices of American Credit Counselors Corp. Monday, the phones were ringing off the hook. On the line were people who had purchased Pokmon cards, electronic games, and Pottery Barn lamps.

"They told me 'I've maxed out on my credit card, the card company wants $400 dollars, and I can't afford it,' " says Ms. Crouse, a supervisor at the Huntersville, N.C., office. "I can tell you we are hearing from a lot more people than last year and a lot more people than we expected."

After paying with plastic during the holidays, many Americans are starting the new year singing the credit-card blues. Credit-card use rose by almost 18 percent this holiday, compared with last year. The mountain of debt, estimated at $550 billion, will grow some $20 billion by Jan. 31.

The surge in the use of plastic this December was an acceleration of a 1990s trend - Americans are increasingly turning to credit cards to pay everything from grocery-store bills to tunnel tolls.

According to some estimates, credit cards represented 26 percent of consumer payments. In 10 years, the Nilson Report estimates this percentage will rise to almost half of all consumer payments as the growth of debit cards and credit cards continues to rise.

"The big reason for the increase in the use of plastic is convenience to consumers and merchants," says David Evans, author of a new book, "Paying with Plastic." "It's a culture that is hooked on using products and services that make things convenient for them."

As part of that trend, Americans are increasingly turning to the Internet to buy goods and services. So far, credit cards are the main way to pay for those purchases. RAM Research, based in Frederick, Md., says consumers will have charged $12 billion to credit and debit cards this holiday period for Internet purchases.

Worried watchers

Economists are watching this plastic party with some concern. So long as the economy is humming, they expect most people will be able to make their payments. But if the Fed raises interest rates and the economy hits the brakes, watch out, they say.

"If the economy slows, consumers may not be able to count on the strong job market, rising income, and booming stock market - under those conditions some consumers could fall behind," says Sung Won Sohn, chief economist for Wells Fargo & Co. in Minneapolis.

Although it's only a few days into the new year, the stock market - one of the bulwarks of the economy - has already had a tough time as interest rates have increased. During the first two days of January, the Dow Jones Industrial Average dropped some 500 points.

The market's fall is related to the concern about rising interest rates. The Federal Reserve meets in early February and is expected to raise interest rates from 0.25 to 0.50 of a percent. For most consumers using charge cards, this won't be catastrophic.

According to industry studies, about 35 to 40 percent of card users run no credit balances, that is they pay off their cards right away. Another 20 percent are occasional borrowers, people who run a credit balance only for a short term. The remaining 40 percent use their credit cards to borrow money.

The average credit-card balance of a borrower is $1,600, says Scott Strumello, an associate with Auriemma Consulting Group in Westbury, N.Y. If short-term financing interest rates go up 0.25 percent to 15.25 percent it would increase financing charges by $4 to $5 per year, or 35 cents a month, he estimates.

"Typically, people continue to use their card, they just don't put it in their wallet, that's where it's potentially troubling," he says.

It's too early to know if the debt load is going to result in an increase in delinquencies, which have remained at the 4.25 to 5 percent level in recent years, down from a peak of around 7 percent in 1997. Historically, late payments increase immediately after the holiday bills begin to arrive.

"Often there's a shock when the envelope pops open," says Ed McLaughlin, CEO of Pay Trust.com, which provides an Internet service for paying bills.

Can consumers pay?

Some analysts don't think that consumers will have a problem making payments. "Barring the quick onset of a downturn in the economy, there should be no problem in the first quarter," says David Robertson, president of the Nilson Report, an industry newsletter based in Oxnard, Calif.

That's not the way others see it, though.

John Waskin, the president of Ms. Crouse's company, says this year the volume of calls to his free nationwide service (www.billfree.org) has doubled.

The average caller has a debt load of $14,500 with five different credit-card companies. Just making the minimum payments on this debt burden would take 22 years to pay off, he says.

Portrait of a debtor

Ms. Crouse says the typical troubled debtor is fairly young and may have a college degree. Many are technologically savvy, she says, since they read about the debt counseling service from the Internet.

The message they get during a phone call (the company only counsels over the phone) is to track their daily expenses, target their financial goals and trim their living costs.

It's a message she will convey with increasing frequency in the next few months. "We're so busy we only have time for 20-minute lunch breaks," she says.

(c) Copyright 2000. The Christian Science Publishing Society

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