THE COMMON SCOLDS ARE OUT IN FORCE, TUT-TUTTING profligate consumers. There's plenty to reprove them for. Credit-card balances last year surged by 26 percent, the fastest growth rate in a decade. Late payments recently hit a 15-year high. Adjusted for taxes, installment interest is taking the largest bite ever out of disposable income. Personal bankruptcies could set a record this year, with more than 1 million households expected to file.
If business fades--as is implied by the slide in stocks--tapped-out consumers will catch the blame. Retail sales are softening. Serial shoppers seem to be pausing to catch their breath.
But how bad is that, really? "There's nothing to say the sky will fall, even with personal debt so high," says economist Sandra Shaber of the WEFA Group in Philadelphia. She'd pop the whole flock of Chicken Littles into a casserole if she could. Year after year, Shaber says, most Americans manage their money well. Now and then they charge up a storm, as happened last Christmas. Then they repent and throttle back. This ebb and flow is as natural as the tide. Recessions often follow consumer spending shifts, but not always.
Some of the debt statistics today are actually looking pretty good. On-time payments improved for auto loans and revolving home-equity lines of credit. Total delinquencies are up, but not by a troubling amount. Loan growth slowed in May for the third straight month, implying that the borrowing orgy has petered out.
A lot of the increase in credit-card use isn't adding to debt at all. It's "convenience" shopping by people who choose to put down plastic in place of cash. Some 36 percent of account holders now pay their monthly bill in full, up from 29 percent in 1991, according to surveys by RAM Research in Frederick, Md., which gathers industry statistics. In many cases, they're using their cards to turn a profit by racking up frequent-flier miles and other rewards.
In crisis:
But although the overall burden of debt isn't as bad as the headlines make it sound, a small but growing minority is indeed in crisis. The banks are their enablers. Credit cards are so profitable that banks have been dealing preapproved cards to practically anyone with a heartbeat and a mailbox--former bankrupts, 20-card wonders, heavy debtors, octogenarians who never had cards before, even the poor whose credit lines sometimes exceed their incomes. In 1994 and 1995, lenders mailed some 5 billion credit-card solicitations. That's 32 offers for every American between 18 and 65, says George Salem of the New York investment bank Gerard Klauer Mattison & Co. Credit-card debt declined between 1983 and 1992 for families earning more than $50,000, but more than doubled for those earning under $10,000.
Most of the marginal borrowers manage to pay. In fact, they're a gold mine because they're charged high interest rates. If they pay late, they're socked with fees. On fees--have you noticed? --card issuers are getting to be as inventive as banks.
Sooner or later, however, these borrowers suffer high delinquency rates--not because they're more careless than others but because they're more vulnerable to life's financial blows. The bankers don't care; they price their cards to cover the risk. It's the newbie users who suffer, all the way to bankruptcy court.
Merciless lending:
But bankruptcy isan't entirely the fault of artless buying or merciless lending. SMR Research, a financial-services firm in Budd Lake, N.J., finds that bankruptcy bears only a slight relationship to debt-to-income ratios or, for that matter, to unemployment rates, rates of mortgage delinquency or poor economic conditions.
The critical factor appears to be state and local public-policy choices, which may put debtors in harm's way. They lead to huge and unforeseen financial burdens, ruinous even to families that don't overspend. Some "insolvency events":
An injury or serious illness with no health insurance. Nevada, with the fourth highest bankruptcy rate in the United States, also has the largest portion of uninsured (nearly 23 percent of the population lacked coverage in 1992). Georgia, Mississippi and California also rank high. Hawaii, by contrast, with only 6 percent uninsured, has one of the lowest bankruptcy rates.
In America as a whole, the total number of uninsured has recently been growing by roughly 500,000 a year--every one of them bankruptcy bait if they're overwhelmed by medical bills.
An auto accident with insufficient insurance coverage. Bankruptcy may be the only way out if you lose a horrific judgment in court. Seven states don't require drivers to carry liability insurance, SMR says. Four of them (Tennessee, Alabama, Mississippi and Virginia) are among the eight states with the highest bankruptcy rates. Among cities, bankruptcy's gold, silver and bronze medals go to Memphis, Birmingham and Tuscaloosa.
Divorce. Lose your marriage, lose your money. Looking state by state and city by city, SMR found a clear correlation between spousal split-ups and bankruptcy rates. California and Oregon stand near the top of this problematical list. But which is the chicken and which the egg? "Usually, divorce follows debt, not the other way around," says bankruptcy attorney Alan Nisselsohn of the New York law firm Brauner, Baron, Rozenzweig & Klein.
Self-employed business failure. This calamity isn't state specific, but the toll will rise whenever the economy slows. To support their hopes, entrepreneurs have been known to borrow against every asset they have, including homes and credit cards. If the business fails, bankruptcy may be inescapable.
You can stave off lesser blows, simply by carrying less debt. George Kinder, a Cambridge, Mass., financial planner, offers this advice for lightening your load: (1) List the after-tax cost of each loan you have. (2) Pay the minimum on your low-rate debt and as much extra money as you can afford on the debts that are costing you the most. (3) As the balance declines, plow your interest savings into yet more debt reduction. That's the highest return on investment you'll find in the economy today.
WILLIAM SLATE, TEMMA EHRENFELD and JEREMY KAHN