Credit Card Debt: Some Context For A Major Financial Dysfunction

by: Paul Rosenberg

Sat Apr 25, 2009 at 12:00

Fortunately, though, despite the persistent inadequacy of Obama's response to the financial crisis, that hasn't translated into uniformly bad and subservient policy.  A story at Huffington Post yesterday, "Obama To Nelson: We're Going Around You", reported that Obama had struck a deal to use the budget reconciliation process to reform student loans, saving students tens of billions of dollars.  (See my mid-March diary "Student Loan Debt--A Symptom of the Conservative Welfare State Shift".) And a diary here at Open Left coming up in a couple of hours from Caleb Gibson of Demos will report on the growing momentum for credit card reform.

In tandem with that diary, I want to draw on two earlier reports from Demos to provide some context for the reform efforts currently taking shape, and to relate them to the larger structure of problems which the financial industry is implicated in, particularly with respect to economic inequality and its racial and gender dimensions.  These reports are "Borrowing to Make Ends Meet: The Rapid Growth of Credit Card Debt in America" (pdf) by José A. García and "Who Pays? The Winners and Losers of Credit Card Deregulation" (pdf) by Jennifer Wheary and Tamara Drautand.  This chart--from the "Borrowing" report--gives some sense of the growth and magnitude of the problem:

This represents a 315% growth in credit card debt from $211 billion in 1989 to $876 billion in 2006 (2006 dollars).  If incomes were growing at a healthy rate, and this debt growth merely reflected voluntary money-management choices, that would still be a matter of concern, given the high rates associated with credit card debt.  But what's actually happening is much more dire. More on the flip.

This is what happens when finance shifts from assisting the functioning of other parts of the economy, to occupying a central role as the end in itself.  The perverted nature of the credit card industry, as highlighted in the reports that follow is but one facet--albeit a very significant one--in this larger and broader economic dysfunction.

And now, on to the reports.

"Borrowing to Make Ends Meet"

As "Borrowing to Make Ends Meet" makes clear, the growth of credit card debt--and the related withdrawal of home equity--results from a combination of stagnant incomes and growing living expenses.  A few graphs make the overall situation starkly clear.

First is the stagnation of income growth since the beginning of the Reagan era, despite  increases in productivity, education levels and the number of two-income families.  Clinton's second term was practically the only period of broad income growth--which still was quite modest at the bottom--while Bush presided over a period dominated by early declines:

Compare that with the steady growth of expenditures over the past 20 years, which proceeded without letup:

And the growth of credit card debt takes on the appearance of a desperate necessity, not a choice:

Also reflected in a drastic decline in the rate of personal savings:

And the much more recent skyrocketing rise in withdrawals of home equity:

The report summarized its main findings (2004 dollars, unless otherwise stated):

• Between 1989 and 2006, Americans' overall credit card debt grew by 315 percent from $211 billion to $876 billion (2006 dollars).
  
• From 2001 to 2006, homeowners cashed out $1.2 trillion in home equity, often in an effort to cope with mounting credit card debt and to cover basic living expenses (2006 dollars).
  
• Nearly six out of 10 households with credit cards revolved their balances in 2004. The average amount of credit card debt among those households reached an all-time high of $5,219, an increase of 89 percent from $2,768 in 1989.
  
• From 1989 to 2004, the percentage of cardholders incurring fees due to late payments of 60 days or more increased from 4.8 percent to 8.0 percent.
  
• In 2004, the average credit card-indebted family allocated 21 percent of its income to servicing monthly debt compared to the 13 percent dedicated to debt payments among all households.
  
• In 2004, 46 percent of very low-income (under $9,999 per year) credit card-indebted households spent more than 40 percent of their income to pay off debt.
  
• From 1989 to 2004, credit card debt among very low-income households quadrupled from an average of $622 in 1989 to $2,750 in 2004.
  
• While white households carry more credit card debt, African Americans and Latinos have a higher percentage of credit card-indebted households. In 2004, of those with credit cards, 84 percent of African-American households and 79 percent of Latino households carried credit card debt compared with 54 percent of white households.
  
• Over 90 percent of African-American families earning between $10,000 and $24,999 had credit card debt.
  
• Since 1989, Americans in the age group of 65 and over have experienced the greatest increase in the amount of credit card debt carried. The average balance for this age group increased 194 percent from $1,669 in 1989 to $4,906 in 2004.

Collectively, this is a picture of an industry making its money off of those least able to pay.  It is not facilitating early realization of growing and sustainable affluence, the way that consumer credit did for the growing middle class of the early Cold War era.  Instead, it is draining the resources of struggling working class and middle class families who are increasingly unable to keep up with rising costs--a dilemma that heavy credit card debt charges only makes much more difficult.

While "Borrowing to Make Ends Meet" gives us a macro picture of the aggregate problem, "Who Pays?" breaks down the aggregate problem into its income, race and gender components.

First, it notes the pre-conditions for this, the diversification of the credit-card market.  The authors explain in their introduction:

It has been nearly two decades since the credit card industry was deregulated with the promise of bringing greater competition and lower prices to consumers. In addition, technological advancements in underwriting, commonly referred to as risk-based pricing, have widened the market for credit cards to lower- and moderate-income consumers. The result: In 2004, 35 percent of households with incomes below $10,000 had credit cards, while more than half of households with incomes between $10,000 and $24,999 had credit cards.1

While much is made of this democratization of credit, there is less public awareness and consumer knowledge about how the cost of credit varies across different segments of the population. Last year alone, households received nearly 8 billion credit card solicitations in their mailboxes.2 Often these solicitations promise teaser rates of 0 percent, or they might dangle the carrot of airline miles or cash-back rewards.

But as our study uncovers, for about one-third of all cardholders, the carrot is not nearly as big as the stick. Today, almost all of the top 10 issuers of credit cards reserve the right to change the APR on the account at any time, for any reason.3 A single late payment-even by as little as minutes-can result in penalty interest rates that average 24.51 percent. Under the shield of deregulation, credit card companies have shifted the cost of credit to individuals least able to afford it-using those profits to underwrite the free loans and bonus miles, rewards and other benefits enjoyed by higher income households. Our research found that four groups-low-income individuals, African Americans, Latinos and single females-bear the brunt of the cost of credit card deregulation through excessive fees and high interest rates.

This chart shows how the range of rates charged has changed over time, in line with the changes that authors just described:

Here's how the rates are distributed in the aggregate:

And here's how top rates are distributed by income level:

In the spirit of Reagan, it's the reverse Robin Hood philosophy in action.

The same can be seen in the distribution by race:

And gender:

Here's the list of key findings, reflecting and elaborating on the above :

• One-third of cardholders are paying interest rates in excess of 20 percent.
  
• Cardholders with household incomes below $25,000 who have credit card balances are two times more likely than households earning $50,000, and five times more likely than households earning over $100,000, to pay interest rates higher than 20 percent.
  
• Cardholders with balances and household incomes between $25,000 and $50,000 are nearly two times as likely as households earning more than $50,000, and four times more likely than households earning over $100,000, to pay such rates.
  
• Credit cardholders in the bottom two income quintiles with credit balances are more than twice as likely to pay penalty interest rates as those in the top two income quintiles.
  
• African-American and Latino credit card holders with balances are more likely than whites to pay interest rates higher than 20 percent.
  
• Seven percent of white cardholders, 15 percent of African-American cardholders, and 13 percent of Latino cardholders pay interest rates higher than 20 percent.
  
• Eleven percent of single women with credit card balances pay interest rates higher than 20 percent compared to 6 percent of single men with credit card balances.
  
• In 2004, 21 percent of consumers reported missing or making a late payment.
  
• Forty percent of African-American and 26 percent of Latino borrowers reported paying late or missing a payment.
  
• Twenty-two percent of single women and more than 30 percent of borrowers with incomes less than $25,000 also reported making a late payment or missing a payment.

Conclusion

The big picture significance here is that, unlike the earlier manufacturing economy, much of the financial sector makes money by extracting it from those least able to pay. The contrast could not be more stark: With widespread unionization, some of the least-skilled were presented with the opportunity to improve their skills, make a solid middle-class living, become homeowners and send their kids to college.  Those who had been on the bottom were given a pathway upwards, and they carried the whole country up with them.  Now, those on the bottom are being exploited and driven down, and now the whole country is teetering on the brink, at the risk of falling even farther than we can imagine.

Credit card reform is one key battlefront in the war to reclaim a more just--and therefore sustainable and prosperous--future for all Americans.  Stay tuned for a closer look at recent developments from Caleb Gibson of Demos