"Check 'n Go: The fastest way to payday." "Cash Connection: Instant Cash for Any Good Check; Pay Day Advances; No ID Required."

These are a few of the signs that greet me as I take an afternoon walk in my urban Detroit neighborhood. When I return home, I see that, in today's mail, there are three credit card solicitations. One company has pre-approved me for $25,000, another for $20,000. The third company is less specific. All offer "cashback" bonuses and "low" interest rates (one boasts 3.9 percent, the second 5.9 percent and the third a whopping 9.9 percent). A company from which I already have a card offers to raise my credit limit to $100,000. Unasked, all of these companies want to loan me money. What's the catch?

Could it be, as Vince Passaro noted in the August 1998 Harper's, that "the cards offered at lower rates convert to usury-rate cards in three to twelve months"? That 3.9 percent interest rate converts to 19.2 percent? One late payment and the rate will increase even further.

Or could the catch have something to do with the growth of so-called credit card banks (banks with more than $1 billion in assets and with credit card balances equal to at least half of total assets)? Janet Yellen of the Federal Reserve Board notes that the return on assets for the roughly 30 credit card banks in America is double that of all commercial banks--a 2 percent annual return as compared to the 1.1 percent for all commercial banks.

Or could it be that the credit card companies and pay chains assume that I am one of the many Americans in debt and willing to spend beyond my means? As Passaro notes, "Across America, the citizenry has managed to rack up $1.2 trillion in consumer debt, which is five times the national defense budget."

Today's credit card industry
Is today's personal debt different from the debt of the past? As in the past, a large portion of this debt rests in household mortgages. There is an extent to which a mortgage is seen as a manageable, acceptable, perhaps even desirable debt. The differences between debt in the past and in the present seem to lie almost wholly in the nature of the credit card industry. As Nan Stone, former editor of the Harvard Business Review and senior research fellow at Harvard Business School, explains, "Let's distinguish between debt and credit. I don't think there's something inherently wrong with debt. Many of us are in debt: for our homes, our mortgages. The issue is how we're using money and what we're using it for."

Stone adds, "Consumer credit in the form of credit cards is a new phenomenon. When I got married 30 years ago people didn't have credit cards, though some had store charge cards, but they had to be pretty credit-worthy. Early on, the history of your own earnings and how you handled other debts was screened.

"I have to believe, just on the basis of solicitations that come not only to my husband and me, who are employed, but to my daughter, who is not employed but who is a student, that it is easy to get credit and easy to get overextended. The economics of credit cards is that they make money on the interest that is charged on balances. So, in a sense, the more you charge and the larger your balance, the more profitable you are as a customer to them. And if you have multiple cards, it is easy to get overextended."

Currently, credit card debt is rising twice as fast as total loans. Revolving credit card debt, in fact, is growing at a rate of almost 20 percent a year.

According to the Federal Reserve Board's Survey of Consumer Finances, since 1983, the number of U.S. households with at least one credit card rose from 66 to 75 percent. Most families--even those below the poverty line--have more than one card. Perhaps more important, the percentage of all U.S. families holding some kind of credit card debt (which means not paying the balance every month) has, since 1989, risen from 37 percent to 43 percent. Among poor families, 36 percent own a card and 69 percent of those maintain a balance. In fact, over 15 percent of poor families maintain a credit card debt that equals their monthly income. For 11 percent of poor families, the debt exceeds twice their income. For families who live at 100-150 percent of the poverty line, 23 percent maintain a debt that equals their income and 15 percent have debt that exceeds twice their income. Statistics are similar for those who live at 150-200 percent of the poverty line. Even among middle-income families, 15 percent have debts that equal their income. Seven per cent have debts that are twice their income. The average credit card share of non-mortgage debt is 39 percent.

Edward J. Bird, associate professor of public policy and political science at the University of Rochester, explains the "practical significance" of this debt. "Consider that at an interest rate of 18 percent, a household with $833 in monthly income, or $10,000 annually, and a credit card debt of $2,000, would take fully 14 months to pay off the debt if it devoted 20 percent of its income--$167 monthly--to the task. If instead the household made a minimum payment of $50 a month--6 percent of its income--it would have to do so for more than five years to be debt-free."

If the family fell behind or missed a payment and received a late charge, it would take even longer.

The deregulation of finance laws
Since the late 1970s and the early 1980s, says Doug Henwood, editor of the Left Business Observer, finance laws have been deregulated. "This makes it possible to create clever new instruments that allow people to borrow beyond their means. Usury laws have been repealed and so lenders may charge as much as 20 percent or more."

The number of credit cards being offered to consumers has increased more than 300 percent in the past decade. A National Bankruptcy Review Commission report notes that, since 1994, over 2.5 billion credit card solicitations have been mailed to individuals. The August 1998 issue of Harper's notes that Fleet Financial Group mailed more than one million unsolicited checks in denominations ranging from $3,000 to $10,000 in 1997 alone.

For those shut out from credit cards and traditional lending, there exists what Michael Hudson, editor and co-author of Merchants of Misery: How Corporate America Profits from Poverty, calls the "poverty industry"--finance companies and high-interest mortgage lenders who are "raking in big money by targeting people on the bottom third of the economic ladder--perhaps 60 million consumers." As Hudson paints it, a consumer "with a dubious credit record pays as much as 240 percent for a loan from a pawnbroker, 300 percent for a finance-company loan, 20 percent for a second mortgage and 2000 percent for a quick 'payday' loan from a check-cashing outlet." Profiting on people's desperation to obtain cash now, NationsBank, for instance, makes big money from America's largest pay chain, Cash America, with 325 outlets across the U.S. Consumers receive a payday advance. The catch? They must turn over their paycheck, along with a weekly interest rate of at least 20 percent. Associates Corporation of North America, a lesser-known subsidiary of Ford Motor, targets low-income and minority consumers, making home equity loans at more than twice the prime rate.

Why are so many people willing to pay 20 percent interest? Why do American consumers have such high levels of personal debt? And why now? Some say that people today aren't frugal, aren't willing to wait to purchase what they want, as they did in the past. Hillary Rodham Clinton, quoted in Roger Rosenblatt's book, Consuming Desires, bemoans unchecked "consumer capitalism" as undermining "the kind of work ethic [and] postponement of gratification historically associated with capitalism."

Maybe. But, says Rosenblatt, unlikely: "America did not transform itself into history's most powerful civilization by abjuring material goods. Directly and indirectly, some 90 percent of the American work force are in the business of producing consumer goods and services."

Henwood adds, "People are so conditioned to borrow and to spend. I don't want to assign personal blame to any of this." He sees consumer debt not so much as a personal problem but a social one. "The American economy," he says, "is built around credit and debt. We have this consumption economy. Today, we have what some call a ‘miracle economy.' But it is built on what seems like unsustainable levels of consumption that depend on credit. For an economy that is booming, we should be doing better than this and this is not the case."

Aspiration--and desperation
Still, debt comes not only as a result of the gourmet cookware stacked in the kitchens of couples who eat every dinner out (and charge it) or from suburban utility vehicles and Rolex watches. But expenditures of these types are the ones that most often make the headlines. The July 18 Sunday New York Times Magazine, for example, reported on two public-school administrators who earned $180,000 a year, owned a $350,000 home, had 24 credit cards, racked up $800,000 in debt and had only $10 in cash.

Most people, in fact, who get into debt trouble do so because, as John Schmitt--an economist from the Economic Policy Institute, a Washington, D.C.-based think tank that specializes in labor and workplace issues--explains: "People's income has been stagnant or in some sense falling for over 20 years. In the 1980s, family incomes grew more slowly than they had in the past, and when they did grow it was because people were working more hours. By running faster, people could stay in the same place. In the 1990s, family incomes were falling despite increased hours at work."

To Henwood, debt comes largely from a combination of "aspiration and desperation." Aspiration: "People at the lower end are trying to maintain the appearance of middle-class standards of living. People in the middle-class are trying to look wealthier than they are." And desperation? "The welfare state is deficit. One reason that people go bankrupt is that there is no welfare state, nothing to help in an emergency, such as a job loss or health problems."

Schmitt agrees. "Credit cards," he states, "are potentially a valuable and useful tool for financial management. They allow you to spread out the payments. There is a long tradition of efficiency of trying to match the debt that you incur to the life of the product. It takes five years, for instance, to pay off a car loan, and it is assumed that the car will last at least that long. A credit card allows you to buy a winter coat that you could pay for all winter. A card can also help in troubled times. If you lose a job, and it takes two to three months to find another, the credit card can help you get by."

The University of Rochester's Edward Bird found that credit cards are one element of the safety net "alongside welfare programs and individual savings." But today welfare has been nearly depleted and people's savings are low. Henwood notes that today's savings rate is the lowest it has been since the 1930s. "We are consuming at 110 percent of our income." The savings rate for the first quarter of 1999 is negative. Many poor people depend on their credit cards more and more to help them maintain necessities: food, shelter, heat and so on. This dependence on credit cards masks the absence of a social policy system that sustains the poor. Yet, the need for such a system could make itself known in dramatic ways, especially if, in a recession, interest rates rise and people lose their jobs. At that point, credit cards will not be enough, especially not for those who have already exhausted their credit.

Schmitt continues: "One of the weirdest things about the 1990s is the boom in the stock market." This boom affects only about 10 percent of the population. The wealthiest 1 percent of the population averages $7.5 million in stock; the next wealthiest 9 percent averages about $250,000 each in stock. The rest of the population has a minute amount--or none.

"The typical family," says Schmitt, "right in the middle of the wealth distribution, owns only about $7,000 worth of stock--in all forms--mutual funds, 401ks, stock that their aunt left them when she passed away. This is not the kind of stock that allows you to retire at the age of 50."

Yet, it is the stock market that the media always looks to when it gauges the country's economic health. Americans are told that the economy is healthy and that they should go out and spend. And Americans have been willing to do this, even as they become more and more indebted.

To gage America's economic health accurately, says Schmitt, we should look at people's net wealth. "How much do you own versus how much you owe? Families' net wealth has actually declined despite the increase in the stock market because households have acquired more debt. For the typical family, the stock market doesn't matter at all to their net wealth."

In fact, the boom in the economy is financed by debt. As Schmitt explains, "On the one hand, more than any other factor, the growth in household debt, from 75.5 percent of total personal income in 1989 to 84.8 percent in 1997, has fueled the current economic recovery. The 'American model' has a lot to do with the U.S. financial system's ability to channel enormous volumes of easy credit to consumers through credit cards and a wide range of real estate-backed loans."

The downside is that growth is unsustainable if your debt increases faster than your income. Eventually, the borrowing and debt will catch up with you. Indeed, more and more people are hitting bottom every day.

Bankruptcy at an all time high (part 2 of this article)