Credit craze causes problems for many

Anne Danahy

Forget that old-fashioned paper money and pull out the plastic.

That's the message in a promotional piece for the new Monopoly electronic banking edition that features a girl and her family swiping their way to fun.

“Faster without cash. That’s how I play,” the girl says, card in hand.

But for thousands of people who find themselves smothering under a pile of debt, switching from cash to credit has not made their lives easier. Rather, it has added them to the growing number of consumers who lose financial footing to rising costs, too much spending, bad circumstances or a combination of reasons.

Nationally, personal savings are no longer negative, as they were in the third quarter of 2005, but they’re still skimpy. The current personal saving rate is 0.8 percent, a continuation of an ongoing decline in how much — or how little — disposable personal income Americans save.

Americans were squirreling away 3.6 percent in 1997, 7 percent in 1987 and 8.7 percent in 1977.

Ginger Cain, a certified counselor at Consumer Credit Counseling Service of Western Pennsylvania’s State College office, said clients have to agree not to use their credit cards if they want to participate in the debt management program.

“I let my clients cut them up themselves,” Cain said.

The three top reasons that people enroll in that agency’s program are rent and mortgage problems, owing more than they can afford, and housing issues.

Cain said many clients are in times of transition — they are divorcing, have lost a job, or have watched illness drain their accounts. Some clients are young and haven’t managed their finances responsibly and others are older, living on a fixed income but facing rising medical costs.

Nationally, the Federal Reserve Board’s 2004 Survey of Consumer Board Finances found that the average balance of families in debt was $5,100, a 15.9 percent increase from 2001.

Some think at least part of the problem rests with credit card companies, and the easy availability of credit.

Linda Sherry, director of national priorities in Consumer Action’s Washington, D.C., office, said many consumers are granted credit limits based on household rather than personal income and see the credit limits on their cards automatically increase.

“I think regulation is very much needed for this industry,” she said.

According to a credit card survey by Consumer Action, a San Francisco-based advocacy organization, the average interest rate on cards is 14.5 percent. Late fees more than doubled between 1995 and 2007, and penalty rates average 24.5 percent but can run up to 32.2 percent.

Consumers can get hit with high interest rates for one late payment and higher rates for cash advances.

Consumer Credit Counseling’s clients have an average outstanding debt of about $17,000 and an average of six creditors, including credit cards and other unsecured loans.

The agency negotiates lower interest rates with creditors and helps clients manage their monthly payments in one lump sum.

A Consumer Credit client from Elk County who asked that his name not be used said his family was $40,000 in the red when he and his wife signed up for the debt management program. It took them six years and monthly payments of $670 to climb almost entirely out of debt.

“We are done,” he said. “It’s a wonderful feeling, believe me.”

To Brian Snyder, pastor of Howard Christian Church, which has been offering a financial management class, the credit card version of Monopoly epitomizes the problem.

“That’s the whole beast right there. You can have it now if you use this piece of plastic,” Snyder said.

He said the Financial Peace class from David Ramsey, a radio show host and author of financial management books, focuses on getting rid of debt, investing, giving back to charities and planning for retirement and college for children.

“Everybody who has been through the class has been changed in one way or another,” Snyder said.

For Snyder’s family, it means reducing their “debt snowball” — paying off one debt, then having more money to pay off the next, even bigger one.