Drowning in Debt?
Americans' love affair with plastic may have a messy ending if interest rates rise
But, as always, there comes a time of reckoning. Consumer debt of all sorts--from home mortgages to credit card balances--has shot up. In 2000, average household credit card balances stood at $7,842, according to Cardweb.com. That figure rose to $8,940 by 2002 and $9,312 last year. "There is an explosion in household debt taking place, and it's a serious problem," says Robert Parks, an economist and finance professor at Pace University's Lubin School of Business.
Chris Viale, chief executive of Cambridge Credit Counseling, says, "Americans are in big trouble right now." He notes that 1 in 4 households is either behind on card payments or over the credit limit on at least one account.
Yet other evidence, both statistical and anecdotal, suggests the picture is much more mixed.
Yes, it's true that households continue to charge up a storm on plastic. But credit card delinquency rates are actually lower today than they were in 2000.
Thanks to still-low interest rates, it doesn't cost Americans as much to finance debt as it did in the 1990s. In 2001, for example, debt payments represented only 18.3 percent of disposable income. Today, the percentage has barely budged, to 18.45.
Even though the savings rate is down, the total dollar amount of savings in deposit accounts has actually grown more than 50 percent to $4.4 trillion since 1999.
Rising assets. That, plus the increased value of real-estate holdings, helps explain why household net worth is thriving as debt is growing. According to the Fed, the net worth of households and nonprofit organizations grew 8.2 percent over the past year and more than 15 percent since 1999, before the bear market in stocks launched an assault on assets.
"I'm not too concerned about the increase in household debt," says James Sullivan, an economics professor at the University of Notre Dame. "Now, if we saw net worth falling, too, then that would be a different story."
The fact is, many families are building income and assets at the same time that they're dealing with debt.
Take the Gabrielsens. While continuing to spend, they've also kept maxing out contributions to Scott's employer-sponsored retirement plan. And they're putting money away for their children's college bills.
To help pay down debt, Cathy, once a stay-at-home mom, recently started selling health- and skin-care products. The job is already adding roughly $4,000 a month to the family's income.
Meanwhile, the couple has invested in a small business, a restaurant and bar in nearby Conshohocken, Pa. The equity in both the business and their home means the Gabrielsens are worth more now than ever--they just have more liabilities than ever, too.
Frederick Spann is another example of credit card debt leavened by home equity. The 41-year-old pharmacy technician from Pontiac, Mich., has amassed roughly $30,000 in debt spread out over eight cards. The culprits: vacations, jewelry, and especially shoes, over 600 pairs housed in a custom-built, cedar-lined closet in the basement of Spann's home. "It's so easy to buy a pair of $300 shoes when you have plastic," he laments.
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