Souls Sold For Plastic Debt

Feh the credit card, that slippery slope toboggan ride, that leads to the mark of the beast tattoed on your hide.

Every day the debt climbs to ever higher levels and our entire culture is in denial about how we will ever pay it back. At the national level the majority of the real money collected in taxes is used to pay the interest on existing debt, and the infastructure expenses are paid with borrowed money. The ponzie pyramid grows like a volcano being pushed up but which hasn't yet exploded. Everybodies bluffing, nobody is calling and yet another round of power poker stokes up the pressure seeking out the point that will blow us all to hell and back.

Been going on so long now that all the chicken littles have been labeled as boys crying wolf, and the warnings of the bottom falling out are regulated to forgotten myths, and placing faith in a safety net of Bretton Woods that no longer exists, all the common man feels like a fool for not grabbing onto the gravy, or is it a hell bound train wreck in the making, and everybodies hoping that unspoken thought that they will die before it runs off the tracks.

Got to eat, got to live, we deserve a life they insist and we got a little plastic card that confirms the reality of this as the fact that is. Who has time to worry of tomorrow when they are busy trying to make it through the day, and the upcoming night is to scary to even think about. If worst comes to worst there is always bankruptcy like the corporations do, but powers that be have decreed that credit card debt need not apply, and with no way out are debtor prisons far behind, or perhaps a buy out with a spot on some Iraqi front line, there are no free rides with devil's deals all comes due in time. Charge the rent, charge the food, what else can we do.

The text that inspired the above rant of mine was this mornings news story on the Microsoft money network written by MP Dunlevy, and what follows was written by her, and can be found in the title link.

The worst kind of debt: Charging the groceries

A whopping balance used to be evidence of a shopping frenzy or luxurious trip. Now, we're paying the rent with plastic. Survival debt is a bad, bad sign.

By MP Dunleavey

Editor's note: Columnist M.P. Dunleavey and six other women have come together online to strip away the myths surrounding money, lay bare their assets and liberate themselves from debt. Follow the quest for financial fabulousness of these "Women in Red" in Dunleavey's column on MSN Money.

Like many of her financial sisters, Yalitza knows from debt. She partied hard in her 20s and didn’t think too much about saving for the future. “I honestly didn’t think I’d live to be 30,” she says.

That “I’ll die before I have to pay this back” logic helped Yali to amass about $18,000 in frivolous debt, which -- after the cold light of her 30th birthday dawned -- she worked double time to pay back. And did.

Now 33, she finds herself battling an even more insidious financial burden: Survival debt.

‘I’ll pay off the card when I get paid’ In the last year, Yalitza and her husband hit a couple of financial potholes. Like many couples, they were busy living life and working toward their future: Yalitza had gone back to school to complete her undergrad degree and was free-lancing on the side. Her husband was paying most of the bills with his freelance design work. Car shopping?

Slowly, survival debt crept into their lives and onto their credit cards. One of Yalitza’s clients was slow to pay her -- but swore the check was almost in the mail. “We had no cash, so I had to put the groceries on my card,” she says. “But I figured the check was coming; I’d pay it back when it came.”

That check never came. (“It was the first time a client just never paid me,” she says.) The groceries stayed on the card. Then the brakes on her husband’s car went -- $700. Worst, he experienced a slump in his own work and Yalitza had to put one, then two, then three months’ rent on her credit card: $3,600.

Cards are paying our day-to-day stuff

We all know that we’re a nation in debt. I’ve cited the same gloomy statistics as often as every other money writer about the shocking number of cards the average American has (about eight); the shocking amount of debt per household (about $8,000).

The most stunning number of all was released by the Federal Reserve earlier this year: In 2003, consumer debt hit an all-time, record, Barry-Bonds high of $1.98 trillion.

(I love dropping that at parties and then adding: “Which doesn’t include mortgage debt” -- just to watch people’s eyes pop.)

But as jaw-dropping and eye-popping as our national debt habit is, there’s something scarier: How much of what goes on plastic these days isn’t frivolous debt but actual living expenses.

Remember when debt was fun?

Time was when that embarrassing chunk on your credit card carried a teeny bit of cachet. An outstanding balance on your card was bad. (Mais oui!) But at least it was a sign you’d tasted the high life; traveled to Spain instead of Miami; hit the hot spots; shopped until you plopped.

Today people are incurring a more dangerous kind of debt, says Tamara Draut, director of economic opportunity programs at Demos, a public policy organization in New York that’s conducting a nationwide study of Americans and debt.

“People are living paycheck to paycheck, and, after they’ve paid the bills, everything else -- like groceries or back-to-school clothes -- goes on the credit card,” Draut says. “Credit cards are picking up the slack in the household budget.”

Across the country, many of the credit counseling services are seeing the same shift. Eight years ago, when Rudy Cavazos started working at Money Management International, the nation’s largest credit counseling service, he says that clients were typically swamped by debt “after a life-changing event -- (because) they were laid off, or there was a serious illness where they had to resort to their credit cards to pay hospital bills.”

Now, says Cavazos, director of education for MMI, people have greater access to credit, higher limits -- and enticements like mileage points -- all of which encourage consumers to put their day-to-day expenses on a credit card.

Of course, many consumers pay off these charges every month. And it's hard to know exactly what percentage of credit card debt qualifies as survival debt, but Cavazos, Draut and others who work closely with debtors say that even those who intend to pay off these charges often fail to do so.

One major factor is how few of us have a cushion of cash in case of emergencies. According to the Bureau of Economic Analysis, people are simply saving less. In 1993, the average American’s savings was an unimpressive 5.9% of disposable income. Ten years later, it had dribbled down to a mere 1.3%.

Is survival debt really so terrible?

But maybe to you, survival debt sounds like a big “So What?” How much can a few groceries, some gas, a dentist visit and your cell phone bill add up to?

So glad you asked.

Over time, and with the swift padding of compound interest and ever-harsher penalties, quite a bit. Draut points out that few consumers realize that if your interest rate kicks up because you missed that midnight deadline your card now enforces, “it’s not just the rate going forward, it’s everything you purchased on that card.”

On top of which is the high cost of denial (Remember him?). Like Yalitza, who intended to wipe out those grocery bills when she got paid, Cavazos says most consumers have good intentions. But they either lack the follow-through to pay down the debt when their paycheck comes -- or in many cases, their paycheck is already spoken for. “It’s a horrible cycle,” he says.

Stephanie Kaniecki, a spokesperson for the Credit Counseling Network, says CCN has been conducting focus groups to better understand their potential clients’ debt problems. “It’s a real eye-opener,” she says, describing families with incomes of about $40,000 who are carrying $10,000 in debt, much of it from living expenses like paying their mortgage or tuition bills with credit.

“They’re managing the minimum payments, but they have no cushion at all when it comes to a crisis,” she says. Moreover: “We felt they were our potential clients, but they didn’t. They were like, ‘Oh, we can pay this off.’ But they didn’t have a plan.”

The worst thing about survival debt, though, is that while you can rein in the debt from shopping splurges or snazzy trips, it’s hard to hold back on living expenses. Especially these days, when it’s possible to pay for just about anything with plastic -- and those occasional expenses turn into chronic credit expenditures.

In 2003, consumers charged $50.6 billion in household expenses on Visa alone, says Robert McKinley, CEO of CardWeb.com, an information provider on credit cards. “That’s for cable, home and cell phone use, insurance, rents or mortgage,” he says.

Not only was that a 27% increase over 2002, McKinley says, given that Visa’s share is half the market, “you can extrapolate from that to safely say that consumers probably charged about $100 billion (in household expenses) last year -- and this year it could be $125 billion.”

About a quarter of the transactions CardWeb tracks are from debit cards, McKinley says, but "people still lean more on [their] credit cards." A big inducement (aside from postponing payment) are the points and mileage credits folks can amass, which debit cards have been slower to offer.

Plastic pushers aren't helping

Some companies are even rewarding consumers for putting their living expenses on credit. “American Express was giving double points for groceries,” McKinley says.

“Groceries were ignored by the industry a decade ago,” he adds, as were medical bills and “recurring payments” like insurance or gym memberships, which are billed on a regular basis. “Those are big growth areas now,” he says.

In fact, credit card companies are doing their best to help consumers feel comfortable acquiring debt at any point in their daily lives. Witness the power of credit in the one arena where you’d think cash would be king: Taxes. The Internal Revenue Service started allowing taxpayers to discharge their tax burden by using credit cards in 1999, according to Michelle Lamishaw, a spokesperson for the institution we all love to hate.

The first year, about 53,300 taxpayers used credit cards to pay their taxes. That jumped to more than 200,000 the following year. In 2003, more than 313,000 taxpayers paid more than $900 million in taxes, an increase of 10% over the prior year.

Hot dog debt: Coming to a fast food restaurant near you

I don’t know what to say except that freedom from debt requires vigilance now, more than ever.

McKinley says that the hot new target for credit card companies is . . . (are you sitting down?) . . . fast food.

That’s right, VisaMasterCardAmexDiscover hope to lure the U.S. consumer even deeper into survival debt (maybe we should call it snack debt?) in increments of $6 or less. According to CardWeb, consumers charged $13 billion in fast food last year. "This year it will be about $20 billion," says McKinley.

At this point, ya gotta ask: Are they crazy? Apparently not. When people pay with plastic -- even at a McD’s drive-thru -- “it lifts the sale by 25 to 30%,” says McKinley. “So instead of a $6 sale, you’ll get $8.”

I guess you don’t have to be at Chanel for that credit-card-induced sense of indulgence to kick in. As McKinley put it: “People will go for the apple pie.”