PUBLISHED BY CONGRESSIONAL QUARTERLY INC.

Formerly Editorial Research Reports

T

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HQCConsumer Debt

Researcher

Nov. 15, 1996 • Volume 6, No. 43 • Pages 1009-1032

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THE ISSUES .........................1011

BACKGROUND ...................1016

CHRONOLOGY ...................1017

CURRENT SITUATION .........1023

AT ISSUE ..............................1025

OUTLOOK...........................1026

BIBLIOGRAPHY ..................1028

THE NEXT STEP ..................1029

THIS ISSUE

CQ

Do Americans buy too much on credit?

In the weeks ahead, millions of consumers will use

credit cards to charge their holiday gifts, possibly

pushing consumer debt to unprecedented heights.

The prospect of new debt levels disturbs some

economists, who note that delinquent credit card accounts

and personal bankruptcies already have reached historic

highs. Others contend that personal indebtedness waxes

and wanes over time, and that the cycle tends to be self-

correcting. Some experts worry that in the years ahead,

consumer debt will continue to rise as card issuers use

sophisticated marketing techniques to put cards in the

hands of students and consumers of limited means. They

also predict that the increasing use of credit cards in such

non-traditional venues as supermarkets and doctors’

offices will further increase the debt load.

1010 CQ Researcher

CQ ResearcherT

HE

Nov. 15, 1996Volume 6, No. 43

EDITORSandra Stencel

MANAGING EDITORThomas J. Colin

ASSOCIATE EDITORSSarah M. Magner

Richard L. Worsnop

STAFF WRITERSCharles S. ClarkMary H. Cooper

Kenneth Jost

EDITORIAL ASSISTANTTonya Harris

PUBLISHED BYCongressional Quarterly Inc.

CHAIRMANAndrew Barnes

VICE CHAIRMANAndrew P. Corty

EDITOR AND PUBLISHERNeil Skene

EXECUTIVE EDITORRobert W. Merry

Copyright 1996 Congressional Quarterly Inc., AllRights Reserved. CQ does not convey any license,right, title or interest in any information — includ-ing information provided to CQ from third parties— transmitted via any CQ publication or electronictransmission unless previously specified in writing.No part of any CQ publication or transmission maybe republished, reproduced, transmitted, down-loaded or distributed by any means whether elec-tronic or mechanical without prior written permis-sion of CQ. Unauthorized reproduction or trans-mission of CQ copyrighted material is a violationof federal law carrying civil fines of up to $100,000and serious criminal sanctions or imprisonment.

Bibliographic records and abstracts included inThe Next Step section of this publication arefrom UMI's Newspaper and Periodical Abstractsdatabase, and are used with permission.

The CQ Researcher (ISSN 1056-2036). FormerlyEditorial Research Reports. Published weekly(48 times per year, not printed March 1, May 31,Aug. 30, Nov. 29) by Congressional QuarterlyInc., 1414 22nd St., N.W., Washington, D.C.20037. Annual subscription rate for libraries,businesses and government is $319. Additionalrates furnished upon request. Periodicals post-age paid at Washington, D.C. POSTMASTER:Send address changes to The CQ Researcher,1414 22nd St., N.W., Washington, D.C. 20037.

CONSUMER DEBT

COVER: BARBARA SASSA-DANIELS

THE ISSUES

1011 • Do record levels ofcredit card delinquenciesand personal bankrupt-cies spell serious eco-nomic trouble for thenation?• Have credit cardcompanies been overzeal-ous in seeking newcustomers?• Are Americans knowl-edgeable about handlingcredit?

BACKGROUND

1016 The Biblical WordModern views aboutcredit and usury wereshaped by the Bible.

1018 Consumer CreditUrbanization fostered anew class of wageearners able to buy oncredit.

1021 Credit CardsIn 1949, Diners’ Cluboffered the first creditcard.

1021 Action by CongressPassage of the “truth-in-lending” law in 1968launched a series ofmodern-era consumer-protection measures.

CURRENT SITUATION

1023 Credit Bureau RulesA new law requires avariety of consumer-friendly changes inbureau operations.

1023 Credit Card WarIntensifying competitionamong card issuers hasraised concerns aboutviolations of consumers’privacy rights.

1024 The ‘Indebted Society’Since the 1960s, borrow-ing by American families,firms and government hasincreased.

OUTLOOK

1026 Charging AheadNon-traditional uses ofcredit cards are expectedto continue expanding.

SIDEBARS ANDGRAPHICS

1012 Bankcard Debt Is RisingAmericans owed more thana half-billion dollars in 1996.

1014 Profile of a ‘Typical’Consumer in DebtAverage debt is $19,000 forthose seeking help withdebt overload.

1017 ChronologyKey events since 1910.

1020 Consumer AdvocatesUrge School CoursesPersonal finance curriculumis suggested in junior highschool.

1022 Are ‘Instant’ Bankruptciesthe Latest Trend?Increasing numbers ofconsumers are filing forbankruptcy.

1025 At IssueHas the credit card industrymade credit too easilyavailable to teenagers andcollege students?

FOR FURTHERRESEARCH

1028 BibliographySelected sources used.

1029 The Next StepAdditional articles fromcurrent periodicals.

BY RICHARD L . WORSNOP

THE ISSUES

Consumer Debt

Nov. 15, 1996 1011

Computer technician DeweyParis of Pasadena, Texas, hadsix children, a failing marriage

and $18,000 in bills to various creditcard companies.

‘‘A lot of people assume that moneyproblems cause the tension in a mar-riage,’’ he says. ‘‘But in our marriage,the tension accelerated our spendingon credit. I wouldn’t stand my groundon some financial issues, because Iwas trying not to rock the boat.’’

When the couple divorced in 1993,Paris, then 43, agreed to accept fullresponsibility for their debts. Aboutsix months later, a Houston consumer-credit counseling firm helped arrangea five-year program to help him wipethe slate clean. Paris has whittled hisdebt to just $6,000, and he plans towrite his last check to the counselingfirm sometime in 1998.

‘‘At some point,’’ Paris now says,‘‘we have to make sacrifices to get ina better position financially. We cando that early on, by waiting until wehave enough money for the things wewant before actually buying them. Or,we can make much greater sacrificeslater, after the credit damage has beendone — which is what I’m in theprocess of doing now.’’

Millions of Americans have foundthemselves in the same leaky boat inrecent years. For example, a surveyissued Sept. 26 by Bankcard Holdersof America, a nonprofit consumeradvocacy group in McLean, Va., foundthat 53 percent of all credit card usersquestioned said they were in debtbecause of ‘‘overspending.’’ Medicalbills and college expenses each werecited by 11 percent of the respon-dents, while 9 percent blamed theirindebtedness on a job layoff. Otherreasons cited for outsized credit cardbalances included divorce costs,

home-repair bills and travel or vaca-tion outlays.

More worrisome to experts whotrack U.S. credit trends are the rises torecord levels of two key indicators. Inthe second quarter of 1996, for ex-ample, the credit card delinquencyrate climbed to 3.66 percent, the high-est number recorded for accountsdelinquent at least 30 days since theAmerican Bankers Association beganmonitoring such data in 1974. 1

In addition, personal bankruptciesare on track to surpass 1 million thisyear, for the first time ever. Indeed,some observers expect the total toapproach 1.1 million. Job layoffs,medical calamities and other unfore-seen emergencies account for muchof the personal-bankruptcy total, as inpast years. But ethicists as well asfinancial executives voice concernover a recent trend toward fraudulentbankruptcy filings by consumers seek-ing protection from their creditorswithout first passing through the de-linquency phase. (See story, p. 1022.)

However, some experts feel that amore positive spin can be put onsome of the supposedly alarming data.It is often remarked, for example, thatthe credit card delinquency rate is

3.66 percent, but that also means thatmore than 96 percent of credit cardholders are current on their payments.

David Robertson, president of TheNilson Report, a credit card newsletterin Oxnard, Calif., argues that risingcredit card indebtedness shows thatconsumers are simply taking advan-tage of opportunities to get cards.

‘‘The opportunity for credit cardissuers is terrific now,’’ he says. ‘‘Salesvolume generated on cards will con-tinue to grow and grow, particularlybecause Americans have the opportu-nity to use the cards in non-traditionalvenues, such as supermarkets. Also,consumers are being rewarded fordoing so. No one rewards them forwriting a check, or for paying cash.But you can earn eight frequent-flyermiles if you buy something for $8 witha credit card at a convenience store.’’

In Robertson’s view, ‘‘There hasnever been a better time to have acredit card than today. Rates andbenefits have never been more com-petitive. Rewards have never beenmore lucrative. That’s because theindustry is dominated by very largeplayers who realize they have to spendmoney to make money. They realizethat the name of the game is buildingthe size of their portfolios, becausethe average profitability per accountwill diminish as they continue to offerrewards and other bells and whistlesto keep their customers happy.’’

Skeptics retort that competition formarket share inevitably will meanextending credit to unwary consum-ers who may assume more debt thanthey are able to repay, as reflected indelinquency figures. Another concernis the spread of credit-identity fraud.(See story, p. 1018.) Moreover, con-sumer advocacy groups and creditindustry officials worry that Americanconsumers are prone to indebtednessbecause many of them are poorlyinformed, at best, about buying oncredit. (See story, p. 1020.)

CONSUMER DEBT

1012 CQ Researcher

Few experts view the current levelof consumer indebtedness as portend-ing major trouble for the economy.But virtually all say that the situationbears close scrutiny. *

it ‘‘is mirrored by a fall in consumer sav-ings. This is a major development. Notonly is the economy in general worse offfor neglecting its savings, but the indi-vidual consumer also finds himself orherself between the proverbial rock anda hard place. . . . Without savings, Ameri-cans must find other ways to bridge thegap between income and expenseswhen the times get rough. Unfortunately,it appears that more borrowing is fastbecoming the solution to this problem.’’ 2

Another worrisome side effect ofmounting credit card debt, ‘‘especiallyat interest rates much higher than thoseapplied to other types of debt, is theloss of regulatory control over credit,’’Medoff and Harless write. ‘‘Under cur-rent conditions, the Federal ReserveBoard cannot effect any reliablechanges in the amount or timing ofdebt increases or credit use. Therefore,a situation exists in which billions ofdollars flow into and out of the mar-ketplace without regulation, checks or

balances. We can only imagine thelong-term effects of this outlaw mon-etary system. But it is foolish to believethat it will have no effect on the typicalAmerican family.’’ 3

But James Chessen, chief econo-mist for the American Bankers Asso-ciation, says that increasing credit carddelinquencies ‘‘pose no serious threat’’to the U.S. banking system. Testifyingbefore a House committee in Septem-ber, he asserted: ‘‘Banks’ exposure tolosses per individual is very small,banks’ loan portfolios are well-diver-sified and the industry has record highlevels of capital and reserves. In fact,if the banking industry wrote off everydollar of every non-performing loan— both consumer and business loans— there would still be $23 billion inreserves left over, without even touch-ing the $365 billion in bank capital.’’ 4

According to Chessen, much of therecent increase in consumer debtstems from ‘‘the rapid expansion inthe number of places that accept creditcards as a means of payment.’’ The listincludes supermarkets, movie theatersand even doctors’ offices, he noted,adding: ‘‘As consumers substitutecredit cards for checks and cash, av-erage balances tend to rise. But thatdoes not necessarily mean that thecapacity of individuals to meet theirobligations has diminished.’’ 5

Warren G. Heller, research directorfor Veribanc Inc., a Wakefield, Mass.,firm that evaluates the condition of banksand other financial institutions, also feelsthe current level of credit card delin-quency is tolerable. That’s because, hesays, self-correcting mechanisms comeinto play when strains develop withinthe credit system.

‘‘If the system is well set up, it hasbuilt-in feedbacks that counter adversetrends,’’ Heller says. ‘‘Today’s situa-tion is a classic case of this. First, thedelinquency trend developed. Then,as more and more people noticed itand discussed it, card issuers startedtightening their credit standards. Andvery few of them have lost money on

Bankcard Debt Is Rising American consumers owed nearly a half-billion dollars on bank-issued Visa and Mastercards as of July 1996, according to the consumer advocacy group Bankcard Holders of America. The total is more than five times the amount owed in 1980. *

* Includes Visa and Mastercard but not American Express and Discover

Source: Bankcard Holders of America, Sept. 26, 1996

in $ millions

0

100

200

300

400

500

’96’95’94’93’92’91’90’89’88’87’86’85’84’83’82’81’80

* Household debt dropped sharply in September,according to the Federal Reserve, falling 2.7 percentto $1.17 trillion. It was the first drop in consumerinstallment debt, mostly credit cards and auto loans,in more than three years.

With the approach of the year-endholiday season, traditionally a peakperiod for credit purchases, here aresome of the questions economists,consumer advocacy groups and oth-ers are asking about rising credit use:

Do record levels of credit carddelinquencies and personalbankruptcies spell seriouseconomic trouble for the nation?

According to James Medoff and An-drew Harless, the authors of a recentbook on debt in America, mounting con-sumer indebtedness is troubling because

Nov. 15, 1996 1013

a net-income basis.’’ In this connec-tion, he notes that, ‘‘Losing money tocard charge-offs is part and parcel ofthe business.’’

At the same time, Heller is disturbedby individual instances of ‘‘pernicious’’credit card abuse. For example, he citesthe college student who used her 20 orso credit cards to support herself as anundergraduate. ‘‘She managed to staycurrent on her debt by robbing Peterto pay Paul,’’ he says. ‘‘Butthen, as she neared graduation,she went to the card issuer andsaid, in effect, ‘Look: I’m overmy head, and I can’t take thehit that this will put on mycredit record. My parents wantto see me get out from underthis, and they’re willing to putup 25 cents on the dollar toaccomplish that. If you’re will-ing to accept the offer on con-dition my credit record staysclean, my Dad will write you acheck.’ ’’

The moral of the story,Heller says, is that ‘‘some cyni-cal gaming’’ is going on amonga minority of cardholders.

Larry Shimmerine, a consult-ing economist for MasterCardInternational, feels rising creditcard delinquency rates reflect‘‘a change in the way creditcards are used. For instance,many small-business people usetheir personal credit cards forbusiness purposes rather thantaking out more traditional types ofloans. Then, when some of those busi-nesses fail, their credit card debts arereported as delinquent.

‘‘Ten years ago, the debts of a failedsmall business would have shown upas delinquencies or defaults on otherkinds of loans. So to some extent,higher credit card delinquencies rep-resent a shift from one form of bor-rowing to another. We really shouldbe looking at all delinquencies [includ-ing home-equity and car loans], insteadof looking at just one loan category

[credit cards]. When you do that, delin-quency levels appear quite low.’’

Ruth E. Susswein, executive direc-tor of Bankcard Holders of America,notes that credit card delinquencies are‘‘at record levels, and that’s disturbing.But at the same time, we have to keepin mind that 96 percent of cardholdersare not delinquent.’’ Personal bank-ruptcies, on the other hand, havereached ‘‘hazardous levels,’’ she says.

Susswein’s assessment is shared bynewsletter publisher Robertson. ‘‘Par-ticularly egregious is the rise in fraudu-lent bankruptcies,’’ he says. Thesetypically involve a middle-incomeconsumer with a half-dozen or morecredit cards but no history of delin-quency. Then, to the consternation ofcreditors, the consumer suddenly filesfor bankruptcy.

‘‘What we have in America today isa situation where, unfortunately, con-sumers feel that personal bankruptcyis part of their menu of financial ser-

vices,’’ Robertson says. ‘‘And we haveattorneys who, for a relatively modestfee, will help a consumer file forpersonal bankruptcy. These attorneysare advertising more aggressively allthe time, making personal bankruptcyand the ease with which a consumercan file for it more readily apparent tothe average person.’’

Howard Hoemann, president of theInternational Credit Association, in St.

Louis, Mo., also worries aboutthe prospect of 1 million-pluspersonal bankruptcies. Butfraudulent filings account foronly a fraction of the total, henotes. Many are prompted byunexpected calamity, such asjob loss or major medical billsnot covered by insurance.‘‘You also have people whohave been living quite welland paying their bills on time,but who suddenly realizethey’re in over their head,’’adds Hoemann. ‘‘At that point,they turn to bankruptcy asthe easiest way to climb outof debt. And then there areflagrant abusers of credit.People who file for personalbankruptcy fall into all ofthose pockets.’’

Hoemann is intrigued bydata suggesting that the per-sonal bankruptcy problem is‘‘fairly evenly distributedthroughout the country.’’ Inthe past, the number of filings

varied from region to region depend-ing on economic conditions. Today,inexplicably, ‘‘There is no area of thecountry that has more bankruptciesproportionate to population than anyother,’’ he says.

Have credit card companiesbeen overzealous in seeking newcustomers?

Experts disagree on the root causeof mounting consumer card delin-quency rates. Some say charge-happycardholders are the main culprits,

‘‘It’s clear that issuers are

responsible for marketing practices

that encourage people to open new

credit card accounts, incur more

debt and make only minimal

monthly payments to retire that

debt. All these practices have

contributed to the delinquency

problems we now confront.’’

— Ruth E. Sussweinexecutive director

Bankcard Holders of America

CONSUMER DEBT

1014 CQ Researcher

while others indict card issuers formarketing their products to youngpeople without credit experience andto adults with checkered credit histo-ries. A third school of thought holdsthat the problem is far too complex tobe solved by finger-pointing alone.

In Susswein’s view, responsibilityfor today’s high delinquency levels ‘‘iscertainly shared’’ by consumers andissuers. ‘‘No doubt about it, we eachhave to be responsible for the debtswe incur,’’ she says. ‘‘At the sametime, it’s clear that issuers are respon-sible for marketing practices that en-courage people to open new creditcard accounts, incur more debt andmake only minimal monthly paymentsto retire that debt. All these practiceshave contributed to the delinquency

Profile of a ‘Typical’ Consumer in Debt Consumers who seek help in managing their finances typically earn $24,000 a year and owe more than $19,000 to 11 creditors, according to the nonprofit National Foundation for Consumer Credit. Foundation members maintain nearly 1,200 offices throughout the U.S. and Canada, under the name Consumer Credit Counseling Service.

Age 35 Sex Male 50% Female 50% Marital Status Single 24% Married 52% Separated, Divorced or Widowed 24% Number in the Family 3.1 Buying or Own Their Home 40% Average Monthly Gross Income $2,000 Average Total Debt (excluding mortgage) $19,688 Average Number of Creditors 11 Primary Cause of Financial Problems: Over Obligation — poor money management 46% Reduced income or unemployment 26% Divorce or separation 11% Medical 9% Other 8%

Source: National Foundation for Consumer Credit

problems we now confront.’’Linda Sherry, editorial director for

Consumer Action, an advocacy groupin San Francisco, faults card issuersfor targeting college students and so-called B and C credit risks — adultswith mottled credit records. Beyondthat, she is troubled that ‘‘easy creditis pushed on people across the board.For instance, every time you walk intoa store, you’re asked, ‘Do you want acredit account opened right now, soyou can get 10 percent off?’ It’s anenticement to take on more creditthan you may require.’’

Sherry also looks askance at ‘‘theplethora of preapproved credit offers thatarrive in the mail after people have been‘prescreened’ by the credit card compa-nies. Now, the person may have a won-

derful credit history, but thatdoesn’t mean he or she needs thetemptation that additional creditrepresents.’’

Shimmerine, the MasterCardeconomist, notes that issuers‘‘have tried to make credit cardsmore available to a wider shareof the population.’’ He regardsthat as ‘‘a very healthy develop-ment, because it helps bringpeople into the mainstream ofthe country’s economic life.

‘‘But let’s face it — the issuersmight have gone too far. Somepeople are getting cards whoshouldn’t have them. However,this is the exception, not therule. And the issuing banks arenow tightening their lendingstandards in an effort to limittheir losses.’’

Nonetheless, Shimmerine ex-pects credit card issuers to con-tinue exploring, though ‘‘very ju-diciously,’’ the B and C credit riskmarket. ‘‘To the extent that the lossrates there are acceptable, the is-suers will expand their promotionefforts. If the losses get too high,they’ll cut back. It’s an ongoingexperiment whose outcome is un-

clear.’’Robertson also foresees additional

efforts to market cards to subprimecredit risks. ‘‘They might be issueddebit cards, not credit cards,’’ he says,adding that the hazards of exploringthe subprime market have been over-stated. ‘‘People who are less well-offget a bad rap. They are consideredhigh credit risks because they oftenare the first ones laid off in a down-turn. In fact, people who are lowermiddle class tend to be very good atpaying their bills. They’re not the oneswho are running off to bankruptcycourt. It’s the middle class and upper-middle-class folks who are doing that.’’

Some of the sharpest criticism ofcredit card marketing practices con-cerns the college market. 6 Many con-sumer advocates argue that college

Nov. 15, 1996 1015

students aren’t mature enough tohandle a credit card responsibly. KenMcEldowney, executive director ofConsumer Action, told a congressionalsubcommittee two years ago that thecredit card industry ‘‘must shoulder theblame for . . . the aggressive ways inwhich it pushes credit card applica-tions [on] students without balancingmessages of easy credit with explana-tions of how to use credit wisely. . . .There is no justification for en-couraging students to apply forand use credit lines that are be-yond their ability to pay.’’ 7

Credit card industry represen-tatives beg to differ. ‘‘College stu-dents may constitute a uniquemarket, but they share many at-tributes with the credit card popu-lation as a whole,’’ Paul Allen, se-nior vice president of Visa U.S.A.Inc., told the subcommittee. ‘‘Theydemand credit cards for the ex-traordinary utility and conve-nience they offer. They wantcredit cards for emergency usesin order to establish a credit his-tory, and indeed to pay for booksand tuition. . . . College studentsuse credit cards mainly as a de-vice to transact purchases, not toobtain an unsecured loan.’’ (See‘‘At Issue,’’ p. 1025.)

Are Americans knowledge-able about handling credit?

Not surprisingly, credit cardissuers and consumer advocatesdisagree on whether Americans are assavvy about the pitfalls of borrowingas they are about the benefits. Allentold the House subcommittee that Visaregards college students as adults, andtreats them as such.

‘‘Like the rest of us, college studentsneed a credit card to make a purchaseby mail, to order an airline ticket and torent a car.’’ Allen said. ‘‘. . .[C]ollege stu-dents are responsible consumers,’’ headded. ‘‘They pay the balance in full one-half of the time, whereas the populationat large carries a balance 60 percent of

the time. . . . Losses per college accounttypically are much less than half of theaverage non-college account.’’ 8

McEldowney retorted that many of thepeople who seek help from ConsumerAction ‘‘are besieged by credit debts andare confused about how to handlethem.’’ Most callers, he said, ‘‘do notunderstand how to determine the truecost of credit or how much they reallyowe.’’ For instance, a frequent comment

is that the credit card issuer ‘‘must bemaking a mistake: I make the minimumpayment every month, but the balance Iowe hardly goes down.’’

For McEldowney, the lesson is this:‘‘If so many adults lack a basic under-standing of how to use credit wisely,how can we expect their children todo any better? We do not believe col-lege students are miraculously betterat handling credit than their elders.’’ 9

Shimmerine rates the credit knowl-edgeability of U.S. consumers as ‘‘veryhigh, in the sense that most people

don’t get themselves into deep troubleby overspending or overborrowing. It’strue that credit cards may make it easierto overspend. Remember, though, thatpeople also ran into serious debt prob-lems before credit cards became widelyavailable.’’

Michael E. Staten, director ofPurdue University’s Credit ResearchCenter, believes consumers find it hardto comprehend, let alone adjust to,

the rapidly evolving world ofcredit. ‘‘It’s clear,’’ he says, ‘‘thatthe sophistication of creditproducts over the last 10 yearshas increased faster thanpeople’s understanding ofthem, especially in terms ofday-to-day budgeting. Today’sfinancial instruments, whetherthey be credit cards or home-equity lines, are far more sub-ject to abuse than they were adecade ago.’’

In Heller’s opinion, Americansare more informed about creditthan they used to be, but ‘‘a tre-mendous gap still exists betweenwhat they know and what theyshould know. A lot of peopledon’t have a basic understand-ing of how interest works, socompound interest just eats themalive. Something like 80 percentof all cardholders use them as acredit mechanism rather than asa payment mechanism.’’

Tahira K. Hira, a professorof human development and

family studies at Iowa State Univer-sity, holds similar views. ‘‘The differ-ence between the credit we had in thepast and the credit that we have todayis really the most crucial point,’’ shesays. ‘‘People today are less informedabout the cost of using credit cardsand not paying off balances in fulleach month.’’

Before the credit card era, Hiranotes, most credit purchases involvedinstallment loans, payable in fixedmonthly amounts of principal andinterest over a prearranged period.

‘‘We now have about a million

people a year filing for personal

bankruptcy and another million

or so going into credit

counseling. These are not

uneducated, poor people —

they’re average Americans, by

and large.’’

— Tahira K. Hiraprofessor of human development

and family studiesIowa State University

1016 CQ Researcher

CONSUMER DEBT

Continued from p. 1018

The concept was easy to grasp, evenby poorly educated consumers. Butthe open-ended credit availablethrough credit cards has led evenaffluent consumers astray, Hira says.

‘‘We now have about a millionpeople a year filing for personal bank-ruptcy and another million or so goinginto credit counseling,’’ Hira says.‘‘These are not uneducated, poorpeople — they’re average Americans,by and large. Research shows that mostof them are educated, and that 90 per-cent are employed. In fact, data showthat the proportion of people with se-rious credit problems who are in mana-gerial and professional occupations ishigher today than it was 15 years ago.So, the problem isn’t lack of formaleducation; it’s inadequate knowledgeof a specific area of personal finance.’’

Consumers aren’t the only ones inneed of a brush-up course on credit,says Consumer Action’s Sherry. Expe-rience has convinced her that, ‘‘Thepeople who man the customer-servicelines at credit card banks and financecompanies don’t know very much,either.’’ She recounts a recent visit toa Radio Shack store to pick up a copyof the disclosure form for thecompany’s credit card. The clerk toldher he had no such forms. ‘‘I said,‘Sorry, but by law you’ve got to havethem.’ So then he went to the man-ager, who told me the disclosure in-formation was on the back of thecredit card application, which Icouldn’t take out of the store. I said,‘I don’t think that’s correct. I have thelegal right to take this home and readit at my leisure.’ Finally, he tore thedisclosure material off the applicationform and handed it to me.’’

In general, Sherry says, ‘‘People arejust very ill-informed on this particularsubject. Even though I’ve seen it saidthat consumers are getting more savvyabout credit cards, such as switchingto the ones with the lowest interestrates, I still question whether theyreally know the ins and outs of re-sponsible credit use.’’

BACKGROUNDThe Biblical Word

The biblical injunction against usuryhelped shape modern Western

views about credit. In biblical times,usury referred to charging any amountof interest on a loan, and it wasbranded a mortal sin, the harshestcensure the church could deliver. Themedieval poet Dante gave expressionto this attitude in The Divine Comedy,which relegates usurers to one of thehottest circles of Hell.

During the Middle Ages, however,pressure for credit overwhelmed thechurch’s efforts to restrain it. Mer-chants, lords and kings required loans,and their needs were met one way oranother. The church itself, as one ofEurope’s richest institutions, enteredinto financial deals with the great Ital-ian banking families — lending, bor-rowing and entangling itself in a prac-tice it publicly condemned.

A turning point came in the latterhalf of the 16th century, when non-profit pawnshops, jointly managed byclergymen and municipal officials,were established to benefit the poor.To cover their operating costs, papalsanction was obtained for charging lowrates of interest on loans. This was asignificant break in the rigid definitionof usury as the taking of any interestfor the loan of money. Theologians

reasoned that the lender should becompensated not only for expenses butalso for the cost of capital — the returnthat could have been earned by plac-ing the funds in investments of similarrisk. In effect, usury was redefined asthe taking of excessive interest, ratherthan the taking of any interest.

Henry VII decided to set interestceilings in England, capping the toprate at 10 percent; by 1714 the figurehad been halved. The 13 AmericanColonies, except for New Hampshire,also set their own maximum interestrates. But they made them just enoughhigher than 5 percent to attract Britishinvestment in the Colonies.

Borrowing was an accepted fact oflife in Colonial America, not just forthe merchants and importers whorelied heavily on credit from theirBritish suppliers, but for their custom-ers as well. Retail credit was availableto farmers on a crop-to-crop basis,with the finance charge determinedby the price the farmer eventually gotfor his crop. Thomas Jefferson, heavilyin debt himself, wrote in 1787: ‘‘Themaxim of buying nothing without themoney in our pocket to pay for itwould make of our country one of thehappiest on Earth. . . . I look forwardto the abolition of all credit as the onlyother remedy.’’ 10 Yet even such anapostle of thrift as Benjamin Franklinis known to have extended credit lib-erally as a printer and bookseller.

A legal market for installment loanswas effectively barred, however, bythe usury laws that America had in-herited from Britain, which prohib-ited moneylending at economicallyfeasible rates. In 1834, more than 200Boston businessmen signed a peti-tion urging the repeal of Massachu-setts usury laws, citing the tradingdifficulties they caused.

Many states deliberately weakenedtheir usury laws, enabling high inter-est rates to prevail despite the strongopposition of Western and Southernfarmers who, being chronic debtors,

According to Hoemann, educatingyoung people about money manage-ment is mainly a parental responsibil-ity. ‘‘Mothers and fathers need to rec-ognize that personal financial skillslearned at home will prepare theirchildren for adult life. It’s an old story.We teach our kids how to earn money,but not how to spend it.’’

Chronology

•

•

Nov. 15, 1996 1017

•

1910s-1920sBanks and other commercialinstitutions begin lending toconsumers in the years beforeand after World War I.

1910The Fidelity Savings and TrustCompany of Norfolk, Va., be-comes the nation’s first majorcommercial business devotedsolely to personal lending.

1919General Motors Corp. sets up itsown financing agency in 1919.Ford Motor Co. follows suit in1928.

1928New York’s National City Bankbecomes the first major commer-cial bank to organize a personalloan department.

1940s Consumerlending is tightly regulatedduring World War II butrebounds strongly with thereturn of peace.

1941President Franklin D. Rooseveltissues an executive order estab-lishing controls over consumercredit, such as minimum downpayments. The Federal ReserveBoard administers the controlsthroughout World War II.

Dec. 1, 1946The Fed lifts credit controls oneverything except a dozen con-sumer durables, including cars.

1949The Diners’ Club card, the firstthird-party, universal credit card,is introduced.

1950s-1960sCredit card use explodes,giving rise to concern that con-sumers are ill-informed aboutthe hazards of revolving debt.

1958American Express and CarteBlanche are introduced.

1966Several large bank credit depart-ments are combined into twonational credit card companies,BankAmericard and the InterbankCard Association (issuer of MasterCharge cards).

1968President Lyndon B. Johnson signsthe Consumer Credit ProtectionAct, which requires creditors togive consumers printed informationabout credit matters.

1970s Consumerborrowing continues to grow,as do efforts to protect con-sumers from questionablelending practices.

1970President Richard M. Nixon signslegislation restricting unsolicitedcredit cards and limiting to $50cardholders’ liability for unautho-rized use of their card.

1974Nixon signs a measure amendingthe 1970 law to protect consumersagainst inaccurate and unfair creditbilling and credit card practicesand to ban discrimination on thebasis of gender or marital statusfrom any credit transaction.

1976BankAmericard changes its name

to Visa. Four years later, MasterCharge becomes MasterCard.

1977President Jimmy Carter signs legis-lation protecting consumers fromharassment by debt collectors.

1980s-1990sBanking deregulation fuelsstill more consumer lending.

1982A banking-deregulation lawsigned by President RonaldReagan frees traditional deposit-taking institutions to competehead-on with money-marketfunds. As a result, banks acrossthe country are able to attractdepositors by offering highinterest on deposits and thenpassing those high rates on toborrowers — including holders ofbank-issued credit cards.

1988Reagan signs legislation requiringdirect-mail solicitations for creditcards to clearly show such infor-mation as annual percentageinterest rates, annual fees andminimum finance charges.

Jan. 6, 1996President Clinton signs theIntelligence Authorization Act,giving the FBI access to credit-report information without acourt order.

Sept. 30, 1996Clinton signs legislation making iteasier for consumers to find outif information in their creditreport has been used againstthem; to contest incorrect reportmaterial; and to withhold theirnames from marketing lists soldto credit card issuers.

CONSUMER DEBT

1018 CQ Researcher

Gangs of ‘Very, Very Slick’ Con Men . . .

Attorney Mari J. Frank of Laguna Niguel, Calif., receiveda chilling phone call in August. “How come you haven’tmade any payments on your $11,000 Toys R Us bill?”

someone from the Bank of New York (BNY) asked.Frank thought it was a crank call. “Who would ever

spend $11,000 at Toys R Us?” she replied. The bankrepresentative explained, “These are charges on a Toys RUs credit card from Bank of New York that was issued toyou last October.” “I went, ‘Oh, my God!’ ” Frank says. “Atthat point, both of us realized it was fraud.”

Frank was luckier than most victims of credit-identityfraud, in which a person’s name and Social Security numberare used by crooks to obtain fraudulent credit cards. Herlegal training had taught her where to find help, and in twodays she had located the thief.

The culprit turned out to be a woman married to apoliceman in Ventura, Calif., about a four-hour drive fromLaguna Niguel. Posing as a private investigator, the woman,Tracey Lloyd, had gained access to Frank’s credit report atEquifax Credit Information Services, one of the nation’sthree main credit bureaus, through a small service companywith access to Equifax’s database. 1 She had also visitedFrank’s law office, where she filched several business cardsfrom a tray on the receptionist’s desk. These enabled Lloydto pose as an attorney-mediator when she sought to opennew credit lines in Frank’s name.

Federal law limits losses on fraudulent credit card debtto $50 per card. But that is often small consolation tovictims. They must spend untold hours trying to determinethe extent of their victimization: How many credit lines didthe thief open in the victim’s name? How much was charged,

and where? Answers may not be forthcoming for months oryears, if ever.

“Banks are quite a bit at fault,” Frank says, because“there’s really no punishment for issuing credit sohaphazardly that it causes these problems.”

Experts blame much credit-identity fraud on gangs of Nigeriancon artists. After entering the United States on student visas,they say, the Nigerians hone their skills at “academies” run bytheir countrymen. “They are the pre-eminent credit cardfraudsters in the world,” says David Robertson, president ofThe Nilson Report, a credit card newsletter published in Oxnard,Calif. “They are very, very slick.”

To carry out their schemes, according to Forbes, credit-identity thieves only need to “access one of the tens ofthousands of computer terminals . . . wired to national creditdata banks. Virtually every bank, insurance company,mortgage broker, stockbroker, auto dealer and departmentstore in the country is on-line. The thieves can then punchup practically anyone’s credit information — Social Securitynumber, address and other personal data — including, ofcourse, credit status. Then they’re off to the races.” 2

In August, Federal Trade Commission staffers examinedone such scam. It involved a man who went to a car dealerto test-drive a truck. The man had fake documents identifyinghimself as ‘John Smith,’ but he claimed to have forgottenhis Social Security number. The salesman obligingly tookthe thief into his office, where he called up several JohnSmiths on his computer screen, each accompanied by aSocial Security number. Randomly claiming one of the namesas his own, the thief obtained a printout of the data aboutthe man, who turned out to be a general contractor.

wanted ‘‘cheap money.’’ The agrarianmovement in American politics, espe-cially during the second half of the19th century, advocated low interestrates along with the free coinage ofsilver and the use of greenbacks aslegal tender. The financial centers ofthe East, in contrast, favored the goldstandard to maintain the value ofcurrency and keep inflation down.

Rise of Consumer Credit

T he industrialization and urbaniza-tion of America wrought signifi-

cant changes in the consumer creditbusiness. A class of wage earnersemerged who had enough money leftafter buying family necessities to en-ter into credit transactions. In manystates, so-called salary loans weremade by ass igning part of theborrower’s earnings to the repaymentof his debt. Lenders were virtuallyassured of repayment, since employ-ers generally were firm believers inthe sanctity of contracts and were aptto fire a worker who showed irrespon-sibility in his financial affairs.

Salary loans tended to plunge bor-rowers into debt for extended periods.Meanwhile, the creditor could claimexemption from the usury laws on theground that he was not lending money

but simply purchasing a salary, as onemight purchase any other commodity.

The city worker’s regular flow ofwages, as compared with the farmer’sor farm laborer’s seasonal income,made possible regular payments onan installment purchase. Other newforces also were at work, as historianDaniel J. Boorstin has noted: ‘‘Indus-try was using newly improved metals(especially iron and steel) to turn outmillions of durable objects, whichnearly every citizen could imagineowning. Since a sewing machine couldusually be reconditioned for the sec-ondhand market, it did not seemimprudent for the retailer to allow acustomer to use the machine while hepaid for it.’’ 11

Continued from p. 1016

Nov. 15, 1996 1019

. . . Turn Credit Card Fraud Into Big ProfitsThus armed, the bogus Smith “began applying for credit

cards, telling the credit card companies that his actual addresswas his ‘new’ address and that [the legitimate John] Smith’saddress was his ‘old’ address,” according to BNA’s BankingReport. “In this manner, the thief obtained more than $50,000in goods and services charged in Smith’s name, in additionto a [new] general contractor’s license. Tracking down thediscrepancies took [the real] Smith six months; correctingmost of the discrepancies took a year.” 3

Robertson expects credit-identity fraud to persist, viewing itas an ongoing game of cat-and-mouse between criminals andthe credit industry. “The criminals exploit an Achilles’ heel, theindustry patches it up and then the criminals locate anotherone.” But the situation has improved somewhat, he says: “Itused to be the industry was one step behind these guys, butnow it’s trying to stay one step ahead.”

Newspaper and magazine articles on credit identity fraudhave made the public more aware of the problem, as hasthe CBS-TV program “60 Minutes.” But increased knowledgehas not brought peace of mind: “Unfortunately, we’re allgoing to be looking over our shoulder too much as weenter the next century.”

Although credit-identity fraud may be impossible to stampout, some precautions can be taken. Frank recommendsthat consumers write a letter to each of the three nationwidecredit bureaus asking that they:

• “Provide me with a copy of my current credit report”;• “Remove my name from any and all mailing lists and

promotions to any entity”;• “Do not change my mailing address or phone number

without verification from me in writing”; and

• “Do not provide my credit report to anyone withoutmy prior permission by phone, fax, or writing.”

Frank says she’s still “furious at the banks.” In her view,they “just recoup their losses from credit-identity fraud bycharging higher interest rates and higher annual fees. Theyconsider it a cost of doing business, just like litigation is.It’s a write-off for them.”

At the personal level, moreover, Frank is consumed byuncertainty. “I still don’t know what else [Lloyd] did. I don’tknow if she took money from people, saying she’s anattorney, and then skipped out on them. I don’t know if shedid anything that will get me in trouble with the InternalRevenue Service. I don’t know if she went to a casino ora racetrack, won some money and then put it on my SocialSecurity number. You see what I’m saying? All kinds ofinsidious things could still happen.”

Lloyd pleaded guilty in October to six counts of felonyfraud. Sentencing is scheduled for Nov. 19. In the meantime,Frank is required to prepare a victim-impact statement.

“What’s scary is that Lloyd gets a copy of it,” Frank says.“Knowing that makes the thing hard to write. I’m worriedthat if I describe my fears, and my kids’ fears, she may getideas about retaliating after she leaves prison.”

1 The three nationwide credit bureaus are Equifax, Atlanta, Ga.; ExperianInformation Solutions Inc. (formerly TRW Information Systems andServices), Orange, Calif., and Trans Union Corp., Chicago, Ill.2 Brigid McMenamin, “Invasion of the Credit Snatchers,” Forbes , Aug.26, 1996, p. 256.3 “FTC Hears Testimony on ‘Credit Theft;’ Suggestions for Ways toPrevent Fraud,” BNA’s Banking Report, Aug. 26, 1996, p. 299.

Salary loans were generally verysmall — $10 to $40. The size of thesums involved forced lenders to chargehigh rates in order to cover their over-head and make a profit. An investiga-tive study published by the RussellSage Foundation in 1908 found thatthe average salary loan office in NewYork had only $10,000 out on loan butcharged interest at an annual rate of120-240 percent, or more. These rateswere often accompanied by heavy-handed collection practices. A favoritetactic of loan offices was to send a fe-male ‘‘bawlerout’’ to the delinquentdebtor’s workplace, where he wouldbe loudly denounced in front of hiscolleagues as a liar and a cheat.

The flourishing loan offices, which

by 1900 were operating in most largecities, bore witness to the need forgovernment regulation of small in-stallment loans. Many of the borrow-ers were genteel but impoverishedcivil servants and members of themiddle class who were unable to liveon their meager incomes, especiallywhen faced with medical bills or fu-neral expenses. At that time, publicopinion was almost as antagonistictoward the borrowers as toward theloan sharks who exploited them.

In addition to fighting the loansharks, philanthropic organizations ledby the Sage Foundation sought toconvince the public that there was apressing need for legal sources ofconsumer credit. Their efforts to at-

tract responsible capital into the con-sumer finance field finally resulted inthe drafting of a model Uniform SmallLoan Act, eventually adopted by moststates. To encourage lenders to makesmall loans, it allowed interest rates inexcess of the limits set by usury laws.

Credit unions, which have becomea leading source of consumer credit,began operating in 1909. Financialinstitutions entered the field muchlater. In 1928, New York’s NationalCity Bank became the first majorcommercial bank to organize a per-sonal loan department.

It was the automobile that trans-formed installment buying into a domi-nant American institution. ‘‘Until auto-mobiles came off the assembly lines

CONSUMER DEBT

1020 CQ Researcher

Consumer Advocates Urge School Courses on Credit Skills

Money-management skills are vital, but they get scantattention in the nation’s schools, says consumeradvocate Ruth E. Susswein. As the executive director

of Bankcard Holders of America, in McLean, Va., sheadvocates a one-year course in personal finance in juniorhigh school, since ‘‘college-bound high school studentsalready are being targeted by credit card issuers. No matterwhat students major in, they will need information onpersonal finance. And they are not formally getting itanywhere now.’’

But schools must have help with the credit-education burden,Susswein says. ‘‘It’s the parents’ responsibility to pass that kindof information on to their children. Also, it’s up to individualsto educate themselves, since this clearly affects them. Andcredit issuers bear some responsibility for educating cardholders,since they stand to gain by doing so.’’

Indeed, the credit industry already is involved in educationprograms aimed at the school-age population. Perhaps thebest-known program is ‘‘Train the Trainers,’’ run by theInternational Credit Association (ICA), whose members arecredit executives.

‘‘It’s a two-day course in which high school teacherslearn the fundamentals of consumer credit,’’ says ICAPresident Howard Hoemann. ‘‘Those teachers pass on theirknowledge to other teachers, who then deliver it to theirstudents. We estimate that 400,000 high school students aretrained each year through the program. And otherorganizations are doing similar things.’’

The National Foundation for Consumer Credit (NFCC)also promotes the wise use of credit. In 1995, thefoundation’s more than 1,100 member offices nationwide‘‘conducted 43,778 live consumer education programs formore than 3.5 million people in an effort to help familiesprevent troubles associated with problem debt and to stressthe importance of money management,’’ the NFCC says.‘‘Educational programs are conducted for a wide variety oforganizations, including employee assistance programs, civicassociations, schools and church groups.’’

Although Susswein regards ‘‘Train the Trainers’’ as a

‘‘terrific program,’’ she notes that school districts generallyregard consumer credit as an elective subject, at best.‘‘Sometimes the information is incorporated into a businessor consumer economics class. Individual school districtsmake those decisions. So, credit instruction is all voluntaryand hit-and-miss at this point.’’

Recent research by Tahira K. Hira, a professor of humandevelopment and family studies at Iowa State University,raised the possibility that school-based credit educationdoes little to change students’ thinking. In a survey of 2,000randomly selected Iowans, Hira asked: ‘‘Looking at yourown money-management behavior, who had the mostimportant influence on you?’’

‘‘I started with a hypothesis that younger people wouldsay they were influenced primarily by outside forces, suchas the media, peers and schools. I also expected the olderrespondents to say, ‘My parents.’

‘‘But to my great surprise, respondents in all age groupscited their parents as the primary source of their money-management knowledge. Often the knowledge was impartedthrough childrens’ observation of their parents’ behavior.Fewer than 10 percent of my respondents said schools hadtaught them most of what they knew about credit.’’

Nonetheless, Hira strongly believes that schools should teachchildren how to manage their own money. ‘‘It’s not somethingthat you can learn just by observing others. I say that becauseI see college students who write checks when they have blankones in the checkbook but no money in the bank, and theydon’t understand why the checks bounce.’’

‘‘It’s easy to assume people know simple things like howto write a check,’’ said Tonia Izzard, an assistant vicepresident at First National Bank of Platteville, Wis. ‘‘Theperception is this is just something you know. Someone hasto teach children how to tie their shoes. Financial servicesare the same way.’’ 1

1 Quoted in ‘‘Combating Financial Illiteracy,’’ Northwestern FinancialReview, Aug. 24, 1996, p. 15

by the millions,’’ wrote Boorstin, ‘‘therewas no other object of universal useso costly as to require a scheme fortime payments.’’ 12 New techniques ofbuying and financing developed evenmore rapidly than the methods ofautomobile production, and providedboth a mass market for cars and aremarkable increase in the volume ofconsumer credit.

General Motors Corp. set up its own

financing agency in 1919, and FordMotor Co. followed suit in 1928. (HenryFord initially opposed time-paymentplans, favoring instead the old-fash-ioned virtues of thrift and prudence.)As the auto industry became concen-trated in a handful of companies, therisk that a manufacturer would go outof business before a car was paid forvirtually disappeared.

The Soldiers’ and Sailors’ Civil Relief

Act, which freed members of thearmed forces from the need to makeinstallment payments during WorldWar II, led to fears among lenders thatmillions might interrupt their paymentsor turn in their installment-purchasedcars. But few did, and this establishedinstallment buying even more firmlyafter the war. From 1919 to 1963,General Motors’ Time Payment Planfinanced nearly 50 million car buyers.

Nov. 15, 1996 1021

Credit Cards

The postwar credit boom grew outof consumer and business adapta-

tion to a changing way of life. AsAmericans’ expectations for the fu-ture rose, so did their willingness toincur debt.

Young married couples are heavyusers of credit, and the number ofyoung people was growing faster thanany other age group. With home own-ership came asset ownership —of stoves, refrigerators and tele-vision sets. And as more womenmoved into the labor force andthe desire for leisure time in-creased, there was added de-mand for labor-saving devicessuch as vacuum cleaners, dish-washers and clothes dryers.

Young adults of the postwarperiod, with higher, more stableincomes than their parents hadenjoyed at the same age, had fewqualms about using credit. Thecredit industry responded by cre-ating new lending instruments.Competing gasoline companiesand large retailers not only of-fered credit but also made it por-table and convenient by introduc-ing the credit card. This was soontransformed into an all-purposecredit device. Starting in 1949 theDiners’ Club, followed by CarteBlanche and American Express,made a profitable business out ofsupplying credit cards and assuming therisk on credit card accounts.

New York’s Franklin National Bankoffered the first bank credit card in1951. In the late 1960s, in order toconvince retailers that enough consum-ers held the cards to make it worthwhileto join their plan, banks began mailingunsolicited credit cards. By then, thewallet-sized squares of embossed plas-tic had worked a revolution in con-sumer finance, as Boorstin observed:‘‘Credit, once closely tied to the charac-ter, honor and reputation of a particular

person, one of a man’s most preciouspossessions, was becoming a flimsy,plasticized, universal gadget.’’ 13

Action by Congress

Concern about mounting consumer in-debtedness prompted demands in the

1960s for protective legislation. Cappingalmost a decade of debate on the issue,

Congress in 1968 enacted the ConsumerCredit Protection Act to help consumersmake informed decisions when they ob-tained credit.

Known as the ‘‘truth-in-lending’’law, it was one of the toughest andmost far-reaching consumer billspassed by Congress since the securi-ties disclosure laws of the 1930s. Itrequired all buyers to be told the costof loans and installment purchase plansin terms of an annual percentage ratecalculated in a specified way. The re-sulting uniformity was designed to let

consumers make valid cost compari-sons between the lending rates or in-stallment plans of different stores orlending institutions, just as they couldcompare the prices of similar productsmanufactured by different companies.

In 1970, Congress banned the issu-ance of unsolicited credit cards and lim-ited to $50 cardholders’ maximum liabil-ity for unauthorized use of their card.The same law regulated, for the first time,consumer reporting agencies. Furtheramendments in 1974 (the Fair Credit

Reporting Act) sought to protectconsumers against inaccurate andunfair credit-billing and creditcard practices, and also banneddiscrimination in any credit trans-action on the basis of gender ormarital status.

Three years later, Congressturned its attention to abusescommitted by agencies that col-lected other companies’ overduebills. Legislation signed by Presi-dent Jimmy Carter on Sept. 8,1977, established a nationwidesystem of controls for collectionagencies. (Excluded from cover-age were department stores,banks and other businesses thatcollected their own debts.) Be-fore the law was enacted, debt-ors were frequently harassed bylate-night phone calls, deceivedby collectors posing as govern-ment agents and humiliatedabout their debt in front of neigh-bors and co-workers.

Laws to combat debt-collection abusealready were on the statute books of 37states and the District of Columbia in1977. However, supporters of a federallaw argued that reliance on state lawshad left about 80 million people whollyor partially vulnerable to collector abuse.Furthermore, increasing use of interstatephone lines was said to have under-mined state-operated control programs.

A banking-deregulation law en-acted in 1982 freed traditional de-posit-taking institutions to competehead-on with money-market funds. As

Legislation signed by President

Jimmy Carter on Sept. 8, 1977,

established a nationwide system of

controls for collection agencies.

Before the law was enacted,

debtors were frequently harassed

by late-night phone calls, deceived

by collectors posing as

government agents and humiliated

about their debt in front of

neighbors and co-workers.

CONSUMER DEBT

1022 CQ Researcher

Are ‘Instant’ Bankruptcies the Latest Trend?

To a considerable extent, the English essayist and criticCharles Lamb reflected society’s attitudes when hedeclared in an 1829 letter: ‘‘It has long been my

deliberate judgment that all bankrupts, of whatsoeverdenomination, civil or religious, ought to be hanged.’’

Fast-forward to The Wall Street Journal of Aug. 28, 1996,and a story topped by a headline that sums up an increasinglycommon contemporary approach to personal finance: ‘‘GoDirectly to Bankruptcy. Do Not Pass Delinquency.’’

For creditors, it ’s alarming enough that personalbankruptcies are expected to exceed 1 million in 1996 forthe first time ever. Even more disturbing is the apparentwillingness of some debtors to walk away from their financialobligations without any pangs of conscience.

‘‘Historically, the pattern for personal bankruptcy hasbeen more of a migration from a 30-day delinquency to a180-day delinquency, which is [an accounting] charge-off,’’said Scott Calhoun, deputy comptroller for risk evaluationat the Office of the Comptroller of the Currency. But now,he says, increasing numbers of consumers are going directlyfrom being solvent one day to filing for bankruptcy thenext, without showing any of the traditional signals ofimminent default. 1

The modern U.S. bankruptcy system dates from the 1978Bankruptcy Reform Act, which overhauled a structure that hadremained virtually unchanged for 40 years. The measure gaveindividual debtors two bankruptcy options. They could file for‘‘straight bankruptcy’’ under Chapter 7, which required themto liquidate their property in exchange for discharge of alltheir unsecured debts. In other words, they would be granteda ‘‘fresh start,’’ free of all prior debt. The second option wasfiling under Chapter 13, which merely postpones repaymentof all or part of the debt, according to a court-approvedrepayment plan extending over several years. Such arrangementsdo not require any property to be liquidated and distributedto creditors. The 1978 law also established a new, independentbankruptcy court system to be operated by judges appointedby the president for 14-year terms.

Critics blamed the changes for the sudden rise inbankruptcy filings, from fewer than 200,000 to 450,000 ayear, which occurred after the law took effect on Oct. 1,1979. They complained that consumers were taking undueadvantage of the law to avoid paying their debts, in some

cases going on credit-financed buying sprees just days beforefiling for bankruptcy.

The Supreme Court, in any event, declared the 1978 lawunconstitutional in 1982. It held that Congress had givenjudges too much power. Two years later, Congress approvedlegislation that curtailed the power of bankruptcy judgesbut otherwise left the earlier statute largely intact.

Ten more years were to pass before Congress againmade major changes in the bankruptcy system. Legislationsigned by President Clinton on Oct. 26, 1994:

• Eliminated delays in bankruptcy cases by streamliningthe judicial process;

• Made it easier for individual debtors to file for Chapter 13;• Cleared the way for payment of income taxes with

a credit card;• Made it more difficult for spouses to declare bankruptcy

to avoid alimony and child-support payments; and• Authorized formation of a National Bankruptcy Review

Commission to review and recommend changes in thebankruptcy code.

‘‘Regrettably, the laws on bankruptcy won’t change beforethe end of 1997, if in fact they ever do,’’ says DavidRobertson, president of The Nilson Report, a credit cardnewsletter. ‘‘The bankruptcy commission won’t report toCongress until the end of 1997, and its proposals obviouslywill become a political hot potato. No one in the industryis expecting anything to happen in terms of relief at thegovernment level.’’

What the industry can do, Robertson says, is ‘‘remindconsumers that if they do file for bankruptcy, their creditwill be sullied. It will be difficult to get a home loan or acar loan. Also, I think you’ll find more information-sharingon the part of card issuers.

‘‘For instance, when Alpha Bank compares notes withBeta Bank, they may find that an individual withdrew a lotof cash from his ATM machine and bought a plane ticketto a nice tropical island later that day. They may also findthat he spent all the rest of the cash advance on the island,and declared personal bankruptcy soon after returning home.Creditors are going to start putting two and two togetherand fighting that sort of thing.’’

1 Quoted in The Wall Street Journal, Aug. 28, 1996, p. C1.

a result, banks across the country wereable to attract depositors by offeringhigh interest on deposits and thenpassing those high rates on to borrow-ers — including the holders of bank-issued credit cards.

‘‘The banks learned an importantlesson during this period: Consumers

continue to incur debt no matter whatthe rate of interest charged,’’ notedMedoff and Harless. ‘‘Thus, even whenthe federal funds rate (the interest ratethat banks charge one another forovernight loans) fell from more than14 percent to less than 9 percentbetween June and December of 1982,

the interest rate on credit cards re-mained high. Moreover, between 1980and 1992, as the federal funds rate fellfrom 13.4 percent to 3.5 percent, theaverage credit card interest rate rosefrom 17.3 percent to 17.8 percent. Theability of banks to borrow money ata fairly low interest rate and to relend

Nov. 15, 1996 1023

CURRENTSITUATION

Credit Bureau Law

A decidedly consumer-friendlycredit-report law cleared Congress

on Sept. 30, the final day of fiscal 1996.Enacted as Title II of the omnibus fiscal1997 appropriations bill, the measurewas designed to make it easier for con-sumers to examine and correct infor-mation in their credit bureau files. 16

Among other provisions, the newlaw required credit bureaus to maketheir reports more intelligible and toinclude in them all the material in anindividual’s file. However, the bureauswere allowed to keep confidential anycredit ‘‘scores’’ or similar data used toassess a consumer’s creditworthiness.

The law also required the creditbureaus to:

• �Set up toll-free numbers for con-sumers and make sure that callers areput in touch with a bureau employee,not just a recorded message.

• �Investigate complaints within 30days and inform the complainant ofwhat happened as a result. Existinglaw also mandates such probes, butsets no deadline for their completion.

• �Notify consumers of their right tohave their names removed from mar-

keting lists used by credit card issuersto prescreen potential customers.

• �Inform consumers of their rightswhen an adverse action is takenagainst them. In such cases, consum-ers are entitled to a free copy of thereport that triggered the action. Theyalso are free to challenge any informa-tion contained in it.

• �Take reasonable steps to ensurethat erroneous information does notreappear in a consumer’s file after ithas been removed.

The law will not take effect untilOctober 1997, giving the credit indus-try time to make any needed adjust-ments. Consumer groups praised thenew safeguards, and industry repre-sentatives voiced no strong objections.‘‘A lot of what it entails is what we hadalready adopted as an industry,’’ saidNorman Magnuson, public affairs di-rector of Associated Credit Bureaus, aWashington-based trade group. ‘‘Wedon’t see any problems with it.’’ 17

Indeed, credit card marketers hadbegun addressing consumers’ privacyconcerns well before the law clearedCongress. Last spring, for example,MBNA America Bank of Wilmington,Del., told prospects for its Platinum Pluscard: ‘‘To help protect your privacy, wewill not sell your name to other compa-nies.’’ And MasterCard International pub-lished a new brochure on credit privacy:‘‘In the Driver’s Seat: Steering your Fi-nancial and Consumer Information in theRight Direction.’’

Credit Card War

Meanwhile, though, fierce compe-tition among credit card issuers

assures that privacy will remain a vola-tile issue. ‘‘Marketing is getting muchmore aggressive, and credit card mar-keting is probably one of the mostinformation-intensive forms of mar-keting you can find,’’ says Martin E.Abrams, director of information policy

it at a high interest rate further spurredthe lenders’ foray into the high-risk[consumer credit] markets.’’ 14

To enhance consumer awarenessof credit card borrowing costs, Con-gress in 1988 mandated the disclosureof certain data. All direct-mail solici-tations for credit cards, for example,had to clearly show annual interestrates and fees, the length of the graceperiod before interest begins to ac-crue and the minimum finance chargesfor cash advances and late payments.

A separate credit disclosure bill thatcleared Congress in 1988 applied tohome-equity loans, which had beenmade possible by sweeping tax-lawchanges approved two years earlier.Such loans proved immensely popular,since they were the only form of con-sumer borrowing on which interest pay-ments remained fully tax-deductible. *

* Under the Tax Reform Act of 1986, deductions forinterest on credit cards and other consumer purchaseswere phased out over five years, beginning in 1988.

Most home-equity loans were open-ended, meaning they provided a lineof credit against which individualscould borrow, often merely by writinga check. However, banks were notsubject in most states to disclosurerequirements for such loans, and theywere free to alter the terms of loans— often to the detriment of borrowers— after they were made. The new lawbarred banks and other lenders fromchanging the terms of loans once theywere established, except that interestrates could be variable, as on someconventional mortgages.

The fiscal 1996 intelligence authori-zation bill signed early this year by Presi-dent Clinton contained a controversialprovision enabling the FBI to obtaincredit reports for counterintelligence in-vestigations. Specifically, the measureallowed the bureau to obtain a courtorder to gain access to consumer creditfiles and find the names and addressesof the financial institutions where an in-dividual had an account. The law alsoprovided that the FBI would have to pay

the credit reporting agency for the infor-mation it obtained and that all partieswould face civil penalties if the FBI probewere disclosed.

‘‘It is anticipated in Washington thatthe new law will be used in investi-gating suspected terrorists or potentialterrorists,’’ noted Credit Card Man-agement, a monthly trade publication.‘‘The number of requests is expectedto be small.’’ 15

1024 CQ Researcher

CONSUMER DEBT

Continued on p. 1026

Fingerhut’s success was hard-won,since conventional credit scoring for-mulas aren’t designed to spot nuggetshidden in the tailings. Instead, they‘‘are geared toward finding the creamof the crop and tossing away the rest,’’according to Bank Technology News.‘‘Less effort is made to distinguish be-

tween the ‘good-bads’ and the ‘bad-bads’ — that is, applicants who exhibitpositive signs of improvement vs. theones with ongoing troubles.’’ 18

Determining who belongs in eachgroup requires intense scrutiny ofcredit histories. The more promisingcandidates ‘‘include people who mayhave had credit skirmishes in the past,but who have cleaned the slate,’’ thepublication said. ‘‘Others may beyoung people who’ve maximized theirlines of credit, but hold promise of

paying them off. Still others are thosewith blemishes tied directly to a lifeevent; for example, a divorce or a se-vere illness could suddenly alter theability to repay, but not affect longer-term habits. The goal is to pick thecandidates who truly want to improvetheir credit ratings, and weed out the

ones who don’t care.’’ 19

Ironically, at the very timethat credit card issuers are re-examining their policies towardsubprime credit risks, they areadopting a harder line towardsome of their most responsiblecustomers. On Sept. 10, GECapital Corp. announced it wasnotifying holders of its GE Re-wards MasterCard that they willhave to pay a $25 annual fee ifthey pay off their balances ev-ery month, thus avoiding inter-est charges. Two weeks later,General Motors halved themaximum car rebate that hold-ers of its gold MasterCard couldearn over seven years from$7,000 to $3,500.

‘‘The GM move under-scores the fact that there are noguarantees with bank creditcards,’’ commented RobertMcKinley, president of RAM Re-search, a credit card trackingfirm in Frederick, Md. ‘‘Once toomany cardholders figure outhow to beat the system, cardissuers change the rules.’’ 20

The ‘Indebted Society’

I n their recent book, Medoff andHarless pointed to a troubling

change in consumer borrowing sincethe 1960s. They noted that the ‘‘clas-sic model for consumer behavior isthat when times are good, peopleborrow in the expectation of moregood times.’’ Today, in contrast,

Increasingly aggressive credit card marketingthreatens consumers’ privacy, consumer advocates say.

and privacy at Experian InformationSolutions Inc., one of the nation’s threemain credit bureaus.

The aggressiveness often takes theform of wooing ever-smaller segmentsof the consumer population. Just a fewyears ago, a typical mass mailing tocredit card prospects comprised about30 million pieces, each contain-ing one of two or three differentsales pitches. Today’s mailingstend to be smaller and moretightly focused: 3 million pieces,say, with up to 25 ‘‘sells,’’ eachtargeting a specific consumersubgroup.

Before long, even this ap-proach may seem scattershot.The time is coming, saysRobertson of The Nilson Report,when card issuers will be able toprepare a mass mailing that’sindividually tailored to eachrecipient: ‘‘Not one that’saimed at everybody in yourZIP code, but just at you.’’

Such customizing of salesappeals is called database mar-keting, which relies on detailedanalysis of credit and demo-graphic data culled from numer-ous sources. The same techniqueis expected to help creditors do abetter job of identifying thebrightest prospects in thesubprime credit market. Sincemost borrowers with top-notchcredit ratings already have at leastone installment loan and one ormore credit cards, lenders haveturned their attention to the less credit-worthy B and C groups.

To some extent, they were inspiredby the performance of Fingerhut Cos.,the consumer catalog marketing firmin Minnetonka, Minn. Fingerhut en-tered the credit card business in early1995, focusing primarily on lower-income consumers. By the end of theyear, it was the nation’s 23rd-largestissuer of co-branded Visa andMasterCard cards, with $500 million inreceivables on 750,000 accounts.

At Issue:

noyes

Nov. 15, 1996 1025

Has the credit card industry made credit too easily available to teen-agers and college students?

KEN MCELDOWNEYExecutive Director, Consumer Action

FROM TESTIMONY BEFORE THE HOUSE BANKING, FINANCEAND URBAN AFFAIRS SUBCOMMITTEE ON CONSUMERCREDIT AND INSURANCE, MARCH 10, 1994.

t he dramatic increase of new players in the credit cardfield has saturated the market and led the industry toreact in two ways that disturb us greatly: the first is to

heavily stimulate usage of cards, such as by encouragingcardholders to use them to pay for groceries and other basicnecessities; the second is to suspend the traditional criteriafor cardholders and offer large amounts of easy credit topeople who have no credit experience or familiarity withthe credit world, namely college students. . . .

Many callers to our [consumer information line] arebesieged by credit debts and are confused about how tohandle them. . . . Most do not understand how to determinethe true cost of credit or how much they really owe. Asurprisingly large number . . . do not realize the implications ofonly making the minimum payment each month; a commonstatement we hear is that the bank must be making a mistake,because, “I make the minimum payment each month, but thebalance I owe hardly goes down. . . .”

While most of the callers to our switchboard are adults,not college students, this fact tends to make us even moreconcerned about the plight of students using credit cards.

If so many adults lack a basic understanding of how touse credit wisely, how can we expect that their children willdo any better? We do not believe college students aremiraculously better at handling credit than their elders.

The following factors tend to mask the degree to whichyoung people are incurring excessive credit card debt:

They make minimum payments, expecting that they willbe able to wipe out their debts at some future time whenthey are employed at high salaries; they rely on theirparents to step in whenever they have trouble paying debts;with credit so easily available to people who already havecredit cards, they apply for more cards and use that addi-tional credit to help them make ends meet.

Such patterns of behavior can only go on so long. For thosestudents who do not graduate, or do not find immediateemployment or high-paying jobs, their post-college lives asyoung adults may be burdened by the nightmare of anenormous debt load, both from credit cards and student loans.

We feel that the credit card industry must shoulder blamefor this problem, especially for the aggressive ways in whichit pushes credit card applications at students, withoutbalancing messages of “easy credit” with explanations ofhow to use credit wisely. . . .

VISA U.S.A. INC.FROM TESTIMONY BEFORE THE HOUSE BANKING, FINANCEAND URBAN AFFAIRS SUBCOMMITTEE ON CONSUMERCREDIT AND INSURANCE, MARCH 10, 1994.

t here is a high demand for credit cards in the collegestudent market. Like other members of modern society,students need a variety of payment methods, including

credit cards. Indeed college students particularly benefit fromcredit cards because such cards enable them to time importantpurchases, such as books and tuition, rather than have suchpurchases subject to available savings or cash flow. . . .

Having and using a credit card as an alternative to cashand checks is a normal and accepted means of payment inour society. . . . As adults, college students have every rightto have access to this payment option. Nearly half of thecollege students in this country live on their own andqualify as “heads of households.” Old enough to vote and toserve in the armed forces, most students appreciate theopportunity to have and use credit cards. Most importantly,a young adult can legally enter into a contractual agreementat the age of 18. A majority of students view credit cardownership and management as another rung on the maturityladder, offering not only a chance to access credit but anopportunity to establish a good credit history. . . .

Contrary to what is often presented in the mass media, theaverage college student uses a credit card responsibly. Morethan half of the 9 million full-time undergraduates in thiscountry have a general purpose credit card — and the majorityof them maintain a better payment record than the generalpublic. Research shows that college students pay the balance infull half of the time. Indeed college students are less likely tocarry balances on their credit cards than the population atlarge, and when they do carry a balance, the amount is aboutone-third that of the average non-college credit card holder.

In fact, the college market mirrors or performs better thanthe general population in all areas of performance. Collegestudents tend to handle their credit cards in the same wayas adults in other age groups — their charge-off ratesappear to be no worse than that for the cardholder popula-tion as a whole.

While the efforts of Visa and its members in marketingcredit products to college students is a way of buildingbrand loyalty and eventually establishing a profitablerelationship, none of the marketing would be worthwhile ifthese students weren’t responsible consumers. Much of themedia coverage on this issue centers on the student who gotin over his or her head and couldn’t meet their financialobligations. These students are anomalies. Nine out of 10college students with credit cards use them wisely — andVisa would not be satisfied with any other outcome.

CONSUMER DEBT

1026 CQ Researcher

American Bankers Association, 1120 Connecticut Ave. N.W., Washington,D.C. 20036; (202) 663-5471. The ABA tracks credit card delinquencies on aquarterly basis.

Bankcard Holders of America, 6862 Elm St., Suite 300, McLean, Va.22101; (703) 917-9805. BHA educates consumers about the prudent use ofcredit and their rights and responsibilities as credit users.

Consumer Action, 116 New Montgomery St., Suite 233, San Francisco,Calif. 94105; (415) 777-9648. This nonprofit advocacy and education groupfocuses on issues related to credit cards.

Credit Research Center, Krannert Graduate School of Management,Purdue University, West Lafayette, Ind.; (317) 494-4380. The center pre-pares and distributes studies on how the credit markets are working.

International Credit Association, 243 N. Lindbergh Blvd., St. Louis, Mo.63141; (314) 991-3030. ICA represents credit industry executives andprofessionals; its “Train the Trainers” program teaches teachers how toincorporate credit education into the school curriculum.

OUTLOOKCharging Ahead

C onsumer advocates and credit in-dustry officials foresee easing of

‘‘when times are bad, people borrowto make up the gap between expec-tation and reality.

‘‘In itself, this pattern is not a prob-lem, because over the business cycle,it is good that people continue to bor-row during a recession. But the pat-tern becomes a problem when the eco-nomic downturn extends beyond along-term trend (as it has). Over time,consumer borrowing starts to tie upmore and more resources that couldbe better allocated to investment.’’ 21

According to Medoff and Harless,consumer debt forms only part of amuch broader phenomenon affectingall sectors of the economy. ‘‘Familiesborrow to maintain lifestyles erodedby falling wages. Firms under pressureto service their current debt forgo in-vestments in future productivity. Andthe government borrows solely to meetinterest payments [on the nationaldebt]. Today one can hardly imagine aworld in which these three groups arenot way over their heads in debt.’’ 22

To ‘‘reverse the vicious circles’’ ofindebtedness ‘‘and move into a virtu-ous circle,’’ the authors recommendsuch steps as higher taxes on the topone-fifth of U.S. households, tax-shel-

tered personal savings, extended job-less benefits and job protection forolder workers. ‘‘Americans will spendsome years in the wilderness beforethe promised land becomes visible,’’they concede. ‘‘Unfortunately for thosehurting in the Indebted Society, wemust pass through it before movingbeyond it.’’ 23

‘‘Debt,’’ the TV Game ShowTelevision, meanwhile, has found a

way to turn consumer debt into massentertainment. The vehicle is a gameshow called ‘‘Debt,’’ which debutedon the Lifetime cable channel inJune. 24 The contestants compete notfor cars, refrigerators and vacations inHawaii but for liquidation of theirpersonal debts, up to a limit of $10,000.

‘‘The country’s in debt!’’ cries WinkMartindale, the show’s host. ‘‘You’reprobably in debt! But most impor-tantly, these three players . . . havecome to us today with their real-lifedebt, and one of them might be luckyenough to get out of it by the end ofthe show.’’ 25

During the first two rounds of‘‘Debt,’’ contestants field questions onpop culture; each correct answer re-duces the amount owed to the player’s

the nation’s consumer credit burdenin the near future. Though credit cardissuers continue to incur more losses,says Susswein, ‘‘they’re still raking inrecord profits. But they also are tight-ening credit standards to cut theirlosses. We should see the results ofthat in the next 18 to 24 months.’’

Heller of Veribanc is even moreoptimistic. ‘‘Absent a severe downturnin the economy, we’ll start seeing theeffects of what the banks and cardissuers are doing to restrain borrow-ing within a year.’’

Looking further ahead, credit ex-perts are guarded about the role of so-called ‘‘smart cards’’ in the credit

Continued from p. 1024

creditors. The contestant who shedsthe most debt then moves on to a‘‘lightning round’’ of 10 additionalquestions. The reward for a perfectscore on these is a check for thecontestant’s total personal debt — upto $10,000.

Even then, the game isn’t necessarilyover. The winner can elect to field onefinal question. The correct answerdoubles the jackpot; a wrong one sendsthe contestant home empty-handed.

After viewing ‘‘Debt,’’ David J. Mor-row of The New York Times reachedsome unsettling conclusions: ‘‘Whilemost contestants know their trivia, don’texpect them to know the interest rateson their credit cards or their monthlyaccount balances. . . . What many ofthese contestants did say, however, wasthat their financial troubles were nottheir fault. The debt is just the price oftheir lifestyle, which by their definitionis Spartan.’’ 26

Nov. 15, 1996 1027

marketplace. Smart cards contain acomputer chip that enables them toperform more than one function. Thechip could, for example, combine thefeatures of a credit card, debit cardand stored-value card.

The most recent test of smart cardson a mass scale occurred in Atlantaduring this year’s Olympic Games. FirstUnion Bank, NationsBank andWachovia Bank of Georgia issuedsome 2 million stored-value cards in$10, $20, $50 and $100 denomina-tions. About 50 Atlanta-area mer-chants, with a combined 1,500 retailoutlets, agreed to accept the cards.But while the issuing banks termedthe experiment a success, Bank Ad-vertising News concluded that ‘‘theproduct was basically a dud, with onlylimited response from a handful ofconsumers.’’ 27

In Robertson’s opinion, ‘‘It will be along, long time before Visa andMasterCard cards have smart chips inthem.’’ However, he predicts that thegovernment will provide welfare recipi-ents with smart cards, so benefits-trans-fers can be made electronically. ‘‘Thiswill eliminate the need to mail checks ordistribute food stamps, for instance,’’Robertson says. ‘‘The idea makes tons ofsense. Considering just the potential forreducing fraud, it would be a terrificchange for the better.’’

However, adds Robertson, ‘‘There’sno reason at all to think smart cardsare going to transform the Visa-MasterCard world, because all thoseretail terminals now in use would haveto be upgraded or replaced. And thatwould cost many billions of dollars.’’

For Susswein, the smart-card issueis a ‘‘classic chicken-or-egg situation.Does a store invest in new technologyto accept these cards before people

Notes

1 See ‘‘Why are consumers cutting back onspending?’’ USA Today, Nov. 4, 1996.2 James Medoff and Andrew Harless, The In-debted Society: Anatomy of an Ongoing Disas-ter (1996), p. 18. Medoff is a professor of laborand industry at Harvard University; Harless isan economic and financial consultant.

3 Loc. cit.4 Testimony before House Committee on Bank-ing and Financial Services, Sept. 12, 1996.5 Loc. cit.6 See Mary Geraghty, ‘‘Students, Wooed byCredit-Card Purveyors, Often Over-CommitThemselves, Colleges Find,’’ The Chronicleof Higher Education, Nov. 8, 1996, p. A37.7 Testimony before Subcommittee on Con-sumer Credit and Insurance, House Commit-tee on Banking, Finance and Urban Affairs,March 10, 1994.8 Ibid.9 Ibid.10 Quoted by Irving J. Michelman, ConsumerFinance: A Case History in American Busi-ness (1966), p. 98.11 Daniel J. Boorstin, The Americans: TheDemocratic Experience (1973), p. 424.12 Ibid., p. 423.13 Ibid., p. 428.14 Medoff and Harless, op. cit., p. 12.15 ‘‘A Green Light for FBI Snooping?’’ CreditCard Management, May 1996, p. 34.16 The three main nationwide credit bureausare Equifax Credit Information Services,Experian Information Solutions Inc. (formerlyTRW Information Systems and Services) andTrans Union Corp.17 Quoted in The Washington Post, Oct. 27,1996, p. C1.18 Jackie Cohen, ‘‘Credit Scoring New Mar-kets,’’ Bank Technology News, July 1996, p. 38.19 Loc. cit.20 Quoted in USA Today, Sept. 24, 1996, p. 2B.21 Medoff and Harless, op. cit., p. 17.22 Ibid., p. 7.23 Ibid., pp. 225-26..24 The ABC network has an option to move‘‘Debt’’ into its prime-time lineup as early asnext year.25 Quoted in TV Guide, Aug. 17, 1996.26 David J. Morrow, ‘‘The Hit Quiz Show forThose Who Owe,’’ The New York Times,Aug. 11, 1996.27 ‘‘Smart Card Reception Lukewarm in At-lanta,’’ Bank Advertising News, Aug. 12, 1996,p. 6.

are using them? Conversely, whyshould people use the cards beforestores can accept them? My hunch isthat smart cards are going to emergeslowly over time. We’ll probably seemore growth in credit and debit cardsand stored-value cards, which willthen evolve into smart cards combin-ing all those features and possiblyothers as well.’’

In the meantime, credit card use insuch non-traditional venues as super-markets and movie theaters is ex-pected to continue growing. ‘‘That’sbecause of the ease of using creditcards,’’ says MasterCard’s Shimmerine.‘‘The consumer only has to pay onecheck at the end of the month. Andsince processing technology has im-proved, credit card transactions canbe handled faster and more cheaplythan before. Therefore, more mer-chants accept plastic.’’

Sherry agrees with Shimmerine’sview of the future, but with someforeboding. ‘‘People are going out oftheir way to charge things like grocer-ies, and it just seems like a really badidea,’’ she says. ‘‘You may be able tohandle the charges now becauseyou’ve got a good job. But supposesomething catastrophic happens? Whowill pay the credit card bills if you loseyour job or fall seriously ill?’’

1028 CQ Researcher

Bibliography

Books

Medoff, James, and Andrew Harless, The IndebtedSociety: Anatomy of an Ongoing Disaster, Little, Brown,1996.Though Medoff and Harless discuss consumer debt, they

devote most of their book to corporate and public indebt-edness. Rising debt, in their view, has distorted theeconomy and heightened feelings of economic insecurityamong working Americans. Among other remedies, theyrecommend raising taxes on the top one-fifth of U.S.households, extending unemployment benefits and en-acting laws to protect the jobs of older workers. “Ameri-cans will spend some years in the wilderness before thepromised land becomes visible,” they write. “Unfortu-nately for those hurting in the Indebted Society, we mustpass through it before going beyond it.”

Articles

Cocheo, Steve, “This Is Not Your Father’s AmericanExpress,” ABA Banking Journal, September 1996.Cocheo, executive editor of the journal, details how

American Express, a credit card pioneer, is working toregain lost market share through more aggressive andflexible marketing.

Daly, James J., “The Pressure Builds,” Credit CardManagement, May 1996.Daly, the editor of Credit Card Management, looks at

rising concern among lenders about credit card delin-quencies and charge-offs. “Clearly, the credit card is stillking of the banking hill,” he writes. “But if the losssituation doesn’t get back under control, plastic couldfind itself dethroned.”

Frank, John N., “The Brouhaha Over Privacy,” CreditCard Management, May 1996.Contributing Editor Frank examines the reasons why many

consumers worry about the privacy of their financial data. Amajor concern is the selling of names to direct-mail market-ers without consumers’ knowledge or permission.

Harden, Lisa, “Combatting Financial Illiteracy,” North-western Financial Review, Aug. 24, 1996.Harden surveys efforts by some bankers and educators

in the upper Midwest to improve the financial savvy ofyoung people.

Hudson, Michael, “Cashing In on Poverty: How BigBusiness Wins Every Time,” The Nation, May 20, 1996.

Hudson shows how certain lenders prosper by cateringto the nation’s least affluent consumers. “Pawn shops,check-cashing outlets, rent-to-own stores, finance com-panies, high-interest mortgage lenders and many othersare raking in big money by targeting people on the bottomthird of the economic ladder — perhaps 60 millionconsumers who are virtually shut out by banks and otherconventional merchants.”

McMenamin, Brigid, “Invasion of the Credit Snatch-ers,” Forbes, Aug. 26, 1996.McMenamin examines consumer-identity fraud, which

occurs when a crook obtains a person’s Social Securitynumber and credit card account numbers and uses theinformation to establish fraudulent credit lines. “Someimposters actually live under the names they steal,” notesMcMenamin. “They take out driver’s licenses, sign leases,even give the stolen names to police when nabbed forother crimes.”

Stark, Ellen, “Swamped by Debt? Here Are Six Waysto Get Out,” Money, September 1995.Climbing out of a debt swamp is never painless, but it

can be done, Stark says.

Zizka, Robert, and Sanford Rose, “Who Wins in Con-sumer Lending — and Why?” Journal of Retail Bank-ing, spring 1995.The authors, both associated with First Manhattan Con-

sulting Group, take a look at “customer data-base man-agement,” a strategy for separating the wheat from thechaff among credit risks.

Reports and Studies

American Bankers Association, 1995 Bank Card In-dustry Survey Report, 1996.The ABA, trade group of the U.S. banking industry,

reviews key legislative and regulatory developments atthe federal level in 1993-94, the first two years of theClinton administration.

Subcommittee on Consumer Credit and Insurance,U.S. House Committee on Banking, Finance and Ur-ban Affairs, Kiddie Credit Cards (published proceed-ings of hearing held March 10, 1994).Representatives of consumer groups and credit card

companies offer contrasting views on whether collegestudents know enough about money management to beentrusted with credit cards of their own.

Selected Sources Used

Nov. 15, 1996 1029

Additional information from UMI's Newspaper& Periodical Abstracts database

The Next Step

Consumer Debt

Bleakley, Fred R., “Consumer debt alarms some ana-lysts,’’ The Wall Street Journal, Sept. 11, 1995, p. A2.Consumers are taking on so much debt that some

economists are beginning to sound alarm bells, predictingthat caution will set in, consumers will pull back and theeconomy will stall. Other economists are more optimistic,saying lenient credit terms allow consumers to carry theirdebt longer.

Browning, E S, ‘‘Heard on the street: Bank stocks fallon fears about cards,’’ The Wall Street Journal, June21, 1996, p. C1. Investors clobbered bank and credit card stocks on June

20, 1996, as worries spread about mounting rates of personalbankruptcy and bad credit-card debt. The sell-off wastriggered by Bank of New York’s announcement on June 19that it would boost credit card loss reserves by $350 million.

Coleman, Calmetta Y., “Consumer debt and charge-offsescalate,’’ The Wall Street Journal, Feb. 12, 1996, p. A2.Credit card issuers are finding that as they reach out for

more customers, they are seeing higher charge-off rates,or accounts written off as uncollectable. The charge-offrates of a number of card issuers are examined.

“Easing in consumer debt,’’ The New York Times,March 8, 1995, p. D2.The Federal Reserve said on March 7, 1995, that con-

sumer credit rose in January at the slowest rate in 20months, led by a decline in borrowing to buy automo-biles. Credit rose $3.7 billion compared with a gain of $6.6billion in December 1994.

“Growth in consumer debt slows sharply,’’ Los Ange-les Times, July 9, 1996, p. D2.The growth in consumer debt slowed sharply in May 1996,

climbing at an annualized rate of just 4.9 percent, accordingto government data released on July 8, 1996. Some analystsattributed the slowdown to a tightening of credit standardsby lenders worried about rising delinquency rates.

Gullo, Karen, “Worries rise over jump in consumerdebt,’’ Boston Globe, Oct. 29, 1995, p. 44.The average American wallet holds seven different credit

cards, contributing to an explosion of consumer debt, accord-ing to RAM Research, a consulting business that follows thecredit card industry. Now, a rise in late payments has someanalysts worried that consumers are overextended, and com-panies that lend money are headed for trouble.

Kaslow, Amy, “Consumer debt could slow 1996, eco-

nomic engine,’’ The Christian Science Monitor, Dec.28, 1995, p. 1.Although 1995 was a solid year for the American economy,

top analysts predict slower growth in 1996, with the glumprospect that a recession could begin right around elec-tion day in November. Factors contributing to an eco-nomic slowdown are highlighted.

Lee, Louise, “Consumer debt crimps profit at Penneyand Dillard as Wal-Mart net rises 12 percent,’’ TheWall Street Journal, Aug. 14, 1996, p. A2.Rising consumer debt levels led to lackluster results at J.

C. Penney Co. and Dillard Department Stores during theirsecond quarters, while Wal-Mart Stores Inc., the U.S.’slargest discounter, bounced back to post a double-digitgain in profit. Penney saw a 19 percent drop in profit inthe period ended July 27, 1996, Dillard posted a slightincrease for its quarter ended Aug. 3 and Wal-Martreported a rise of 12 percent.

McGeehan, Patrick, “Consumer debt worries weighon stocks,’’ USA Today, Oct. 26, 1995, p. B3.The Dow Jones industrial average fell 29.98 points to close

at 4753.68 on Oct. 25, 1995, while the S&P 500 fell 4.07 to582.47 and the Nasdaq composite fell 12.77 to 1026.47.

Montague, Bill, “Heavy credit card use pushes con-sumer debt up 8 percent in,” USA Today, Sept. 10,1996, p. B2.Consumer credit rose at an 8 percent annual rate in July

1996, the biggest gain in three months. The consumer creditfigure, reported Sept. 9 by the FRB, was slightly higher thananalysts expected due to the fact that credit card debt soaredin July at a 19.4 percent annual rate. Monthly consumercredit is depicted for July 1995—July 1996.

Shao, Maria, ‘‘Rising debt of consumers spurs wor-ries,’’ Boston Globe, June 21, 1996, p. 83.From credit card late payments to mortgage delinquen-

cies to personal bankruptcies, U.S. consumers seem stretchedto the max in June 1996. While the overall economy hasbeen humming along with low inflation, a number ofsigns have emerged that consumers, who account for two-thirds of economic activity, are under stress.

Tharpe, Gene, “Consumer debt piling up,’’ AtlantaConstitution, June 10, 1996, p. E2.Tharpe notes the burgeoning debt-collection business in

America and offers advice on consumer protection rightsconcerning collections.

Vogel, Thomas T. Jr., “Consumer debt worries are over-blown,’’ The Wall Street Journal, Dec. 14, 1995, p. A2.

1030 CQ Researcher

CONSUMER DEBT

Worries about the surge in consumer debt may beoverblown, a growing number of economists are conclud-ing. The American Bankers Association reported Dec. 13,1995, that while bank credit delinquencies have reachednear record levels, there have not been similarly largeincreases for broader measures of consumer debt.

Credit Card Delinquencies

“Credit card delinquencies almost hit 15-year high,’’The Wall Street Journal, June 11, 1996, p. A16.The American Bankers Association reported that credit

card delinquencies reached an almost 15-year high in thefirst quarter of 1996. The percentage of overdue credit cardaccounts hit 3.53 percent in the quarter, up from 3.34percent in the last quarter of 1995.

“Credit Card Delinquencies Reach a Record Level,’’The New York Times, Sept. 18, 1996, p. D4.The rate of late payments on credit cards reached a

record level in the second quarter of 1996, the ABA said onSept. 17, citing the effect of loose lending standards.Delinquencies were reported on 3.66 percent of creditcard accounts, up from 3.53 percent in the first quarter.

Hershey, Robert D. Jr., “Credit card delinquencies rise;Price report shows no inflation,’’ The New York Times,March 15, 1996, p. D1.The ranks of consumers who have fallen behind on credit

card payments edged up to match a 10-year high in the finalquarter of 1995, a sign of growing household distress thatsome economists argue threatens to bring the five-year-oldeconomic expansion to an end. Meanwhile, prices paid tofactories, farmers and other producers fell in February 1996for the first time in eight months, easing fears that the bigjump in new jobs might lead to higher inflation.

Matthews, Gordon, “Credit card delinquencies worrystock analysts,’’ American Banker, June 13, 1996, p. 1.Some Wall Street analysts are growing more worried

about the impact of rising credit card losses on bankearnings and stock prices. Their concerns heightened theeffect of news during the week of June 9 from theAmerican Bankers Association that card account delin-quencies reached a 15-year high in the first quarter.

Stark, Ellen, “Avoid these high credit card charges,’’Money, January, 1996, p. 38.Credit card delinquency rates are at their highest mark

since recessionary 1991. Card holders can avoid highcredit card charges by grabbing a low-rate card, notoverstepping their credit limit and avoiding late charges.

Credit-Identity Fraud

Dugas, Christine, “Credit card fraud is put to the test,’’USA Today, May 15, 1996, p. B1.Biometric technologies, based on unique personal character-

istics such as fingerprint, retina scan or voiceprint, are beingtested by banks in an effort to stop credit card fraud .

McLeod, Ramon G., “Beyond credit card theft,’’ SanFrancisco Chronicle, Aug. 30, 1996, p. A26.Theft of identity may be one of the fastest-growing forms

of credit card fraud today, according to a report issued onAug. 29, 1996, by the California Public Interest ResearchGroup. However, consumers can take some simple stepsto protect themselves.

“U.S. invades privacy in Nevada credit card sting,’’Denver Post, Sept. 10, 1996, p. B8.An editorial comments on a Las Vegas, Nev., case where

the federal government, in an attempt to snare a computeroperator who had expressed interest in illegally obtainingcredit card information, and a major bank, gave a sus-pected crook the credit card numbers and personal histo-ries of citizens, without their permission or knowledge.

Credit Card Marketing

Croghan, Lore, “The Avis of credit card data,’’ Finan-cial World, July 18, 1995, p. 56.Total System Services is investing in cutting-edge tech-

nology to try to become number one in the credit carddata-processing business. The $188 million-in-sales cardprocesser hopes new software will win over banks.

“First USA to add 2 credit card processors,’’ The NewYork Times, Aug. 26, 1995, p. A35.First USA Inc. said on Aug. 25, 1995, that it would acquire

the U.S.’s two largest independent direct-marketing creditcard processors in separate stock and cash deals for undis-closed terms. Dallas-based First USA said it would offer stockto acquire Litle & Co. and pay cash for the DMGT Corp.

Fitzgerald, Kate, “In credit card business, relation-ships count,’’ Advertising Age, Oct. 7, 1996, p. S18.John D. Hayes is an advertising executive at American

Express, and John Cochran is the chief marketing officerat MBNA America Bank. Cochran is a master of databaseand relational marketing. Hayes oversaw the launch ofAmerican Express’ first global advertising campaign.

“Kmart Plans Nationwide Expansion of Credit Card,’’The New York Times, Aug. 28, 1996, p. D3.The Kmart Corp. said on Aug. 27, 1996, that it would

make its new credit card available in more than 2,100stores across the U.S. The discount retailer had strongresults in test-marketing of the credit card at 167 stores.

Murray, Matt, and Vanessa O’Connell, “Banc One totest credit card that lets holders borrow against 401(k)money,’’ The Wall Street Journal, June 24, 1996, p. A7.Banc One Corp has decided to proceed in fall 1996 with

test-marketing a long-discussed credit card that would permitholders to borrow against their 401(k) retirement accounts.

Nov. 15, 1996 1031

Sheets, Ken, “Does your credit card match your style?’’Kiplinger’s Personal Finance Magazine, January 1995,pp. 112-116.Credit cards that are tailored to match particular spend-

ing profiles are described. Consumers who carry a balanceof less than $1,000 should get a no-annual-fee card.

Tharpe, Gene, “Credit card offers: Reality in the fineprint,’’ Atlanta Constitution, Nov. 13, 1995, p. E2.Tharpe explains the realities behind some of the market-

ing lures used in preapproved credit card offers.

Personal Bankruptcy

de Senerpont Domis, Olaf, “Bankruptcy too easy anout, Visa exec. tells banking panel,’’ American Banker,Sept. 13, 1996, p. B2.Kenneth Crone, vice president of Visa U.S.A.’s risk

management and security division, told a House BankingCommittee hearing on consumer loan delinquencies Sept.12, 1996, that the Bankruptcy Code “allows debtors toobtain more protection than they need.” Crone argued thatunless Congress legislates to curb the rate of bankruptcies,banks will be forced to restrict how much credit they offer.

Dugas, Christine, “Bankruptcy cases grow despitehealthy economy,’’ USA Today, Aug. 9, 1996, p. B6.Despite good economic news, debt is a growing problem

for many Americans, resulting in more bankruptcy filings,perhaps a 20 percent jump in 1996. The types of personalbankruptcy are examined, as well as other factors besidesdebt that can lead to bankruptcy.

Dutt, Jill, “Bank losses on credit cards rise,’’ The Wash-ington Post, Sept. 12, 1996, p. D9.Bank credit card losses are at their highest level since

1992, the federal government reported Sept. 11, 1996, inwhat many analysts said is both a side effect of the surgein personal bankruptcy filings as well as fallout from yearsof corporate downsizing.

Frank, Stephen E., “Your money matters: Weekend re-port: Over your head in debt? Bankruptcy offers newstart,’’ The Wall Street Journal, Aug. 23, 1996, p. 1.For many Americans mired in debt, bankruptcy can

actually be good news. Indeed, the bankruptcy laws wereintended to help people wipe the slate clean and startover. And for some people hopelessly over their heads inbills, a fresh start is just what they need. The pros and consof claiming personal bankruptcy are examined.

Kogan, Rick, “The age of Aquarius,” Chicago Tribune,p. 13. June 30, 1996Theater producer Michael Butler is profiled as he emerges

from personal bankruptcy. Although Butler produced the playand the film “Hair,” he lost millions of dollars over his career.

Tharpe, Gene, “Going for broke,’’ Atlanta Constitu-tion, Sept. 23, 1996, p. E1.Personal bankruptcies filed nationwide climbed to record

numbers during the last two quarters, and estimates arethey will top 1 million for 1996, the first time ever for acalendar year. The Atlanta and north Georgia district, forthe 12 months ending June 30, recorded slightly fewer than28,000 personal bankruptcies, the sixth-highest districttotal in the U.S.

Trumbull, Mark, “Rising bankruptcies show value ofmanaging debts,’’ The Christian Science Monitor, Sept.3, 1996, p. 9.In the year ending June 30, 1996, the number of bank-

ruptcy filings totaled more than 1 million for the first timeever in a 12-month period. That’s almost one person forevery 100 U.S. households. If bankruptcy has lost some ofits stigma, however, it hasn’t lost its sting, both emotion-ally and in a tarnished credit record.

Students as Target of Credit Card Marketing

“American Express Co.: Credit card for the young isbeing test-marketed,’’ The Wall Street Journal, Aug. 15,1995, p. A10.American Express Co. is test-marketing Personal Choice,

a credit card targeted at younger people without a credithistory. The new card allows holders to choose their owncredit limit between $500 and $1,500.

Dugas, Christine, “Credit card firms recruit new userson campuses,’’ USA Today, May 28, 1996, p. B1.Credit card companies are aggressively pursuing college

students, who haven’t hesitated to accept the offers. In 1996,consumers under age 30 are more likely to carry a credit cardbalance and to be worried about the amount of debt they arecarrying, according to an informal USA Today reader survey.

Meece, Mickey, “Star and student loan group sending creditcard to school,’’ American Banker, Aug. 8, 1996, p. 10.College students on 31 campuses this fall will be able to pay

for school-related expenses at selected merchants withCollegeCard, the brainchild of nonprofit, student-lendingorganization Southwest Student Services Corp of Mesa, Ariz.,Star Banc Corp. of Cincinnati issues the private-label card andTotal System Services Inc, Columbus, Ga., processes thetransactions. Star Bank said the card is underwritten like astudent loan, so it’s no risk to the bank.

Shepardson, David, “U-M students can use school creditcard off-campus,’’ Detroit News, April 26, 1995, p. B7W.With some kinks still to be worked out, 500 University of

Michigan students and Ann Arbor merchants are testing aprogram that allows school credit card holders to makepurchases at off-campus locations.

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MAY 1995Assisted Suicide ControversyOverhauling Social SecurityLearning to ReadMandatory Sentencing

JUNE 1995Combating Infectious DiseaseProperty RightsRepetitive Stress InjuriesRegulating the Internet

JULY 1995War CrimesHighway SafetyCombating TerrorismPreventing Teen Drug Use

AUGUST 1995Job StressOrgan TransplantsUnited Nations at 50Advances in Cancer Research

SEPTEMBER 1995Catholic Church in the U.S.Northern Ireland Cease-FireHigh School SportsTeaching History

JULY 1996Recovered-Memory DebateNative Americans’ FutureCrackdown on Sexual HarassmentAttack on Public Schools

AUGUST 1996Fighting Over Animal RightsPrivatizing Government ServicesChild Labor and SweatshopsCleaning Up Hazardous Wastes

SEPTEMBER 1996Gambling Under AttackThe States and FederalismCivic JournalismReassessing Foreign Aid

OCTOBER 1996Political ConsultantsInsurance FraudRethinking School IntegrationParental Rights

NOVEMBER 1996Global WarmingClashing Over Copyright

Future Topics

Governing Washington, D.C.

Welfare, Work andthe States

Volunteerism

Great Research on Current Issues Starts Right Here...Recent topicscovered by The CQ Researcher are listed below. Before May 1991, reports

were published under the name of Editorial Research Reports.

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OCTOBER 1995Quebec’s FutureRevitalizing the CitiesNetworking the ClassroomIndoor Air Pollution

NOVEMBER 1995The Working PoorThe Jury SystemSex, Violence and the MediaPolice Misconduct

DECEMBER 1995Teens and TobaccoGene Therapy’s FutureGlobal Water ShortagesThird-Party Prospects

JANUARY 1996Emergency MedicinePunishing Sex OffendersBilingual EducationHelping the Homeless

FEBRUARY 1996Reforming the CIACampaign Finance ReformAcademic PoliticsGetting Into College

MARCH 1996The British MonarchyPreventing Juvenile CrimeTax ReformPursuing the Paranormal

APRIL 1996Centennial Olympic GamesManaged CareProtecting Endangered SpeciesNew Military Culture

MAY 1996Russia’s Political FutureMarriage and DivorceYear-Round SchoolsTaiwan, China and the U.S.

JUNE 1996Rethinking NAFTAFirst LadiesTeaching ValuesLabor Movement’s Future

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