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Going under

Credit-card debt is sinking many naive consumers

Terry Greenman sleeps easier at night now that his credit cards are paid off.

Just three years ago, the 57-year-old life-insurance salesman had racked up $78,000 on four credit cards.

Thanks to new business opportunities and the determination to rid himself of debt, Greenman today owes nothing on his credit cards and has even paid off the $200,000 mortgage on his Wasatch County home.

He is one of the lucky ones.

Many Americans are drowning in a sea of debt.

According to the most recent Survey of Consumer Finances by the Federal Reserve Board, credit-card debt increased during the 1990s over all income groups, particularly among poor and low-income families.

"You've got all of these available credit cards sent in your mail. All you have to do is sign it and you've got it," said Scott McCagno, president and chief executive officer of Consumer Credit Counseling Service of Utah, a nonprofit group offering free education about credit to people with debt problems.

"We are seeing a huge number of teenagers going into debt and declaring bankruptcy at 19 and 20. We are seeing a huge amount of college students. We are seeing a huge amount of middle- and lower-class people."

In fact, the number of households with at least one credit card rose from 16 percent in 1970 to 65 percent by 1995. And the average amount owed on a credit card quadrupled during the same period.

"In the good times, of course, spending is spending, and obviously there is a lot of spending that occurs on credit," said Kelly Matthews, Wells Fargo executive vice president and economist.

"Credit is one of those things that is good as long as people can make their payments and they have jobs and everybody is fine. But when things start unraveling and you can't make those payments, then it becomes a major contraction."

Carrying high credit-card debt didn't seem so bad a year ago when the economy was invincible and consumers couldn't consume enough.

What a difference a year makes.

The rise in revolving debt among households in the 1990s was accompanied by more threatening signs, which included delinquent payments, personal bankruptcy filings and credit card charge-offs by banks.

During this year's second quarter the nation's banks wrote off $2.8 billion in credit card debt, up almost 27 percent from the previous year.

And Utah continues to witness record numbers of personal and business bankruptcy filings.

In August, nearly 1,900 Utahns filed for bankruptcy. Filings in the state are up 32 percent when compared to the first eight months of 2000. Last year one out of every 46 Utah households filed for bankruptcy, the second-highest number of filings in the nation.

It's a scene of easy credit and lenient standards. Consumers can borrow more than they can repay, as some credit-card companies target riskier customers with higher rates and fees, sometimes as much as 40 percent compounding annual rates, McCagno said.

"There is so much available credit out there and so few 'A' credit risks that actually want that much credit, that companies, to survive, have had to go into the 'B' and 'C' portfolios," McCagno said.

That opinion is backed by the Federal Reserve.

"Strong competition among credit-card lenders in the 1990s induced them to offer credit cards to riskier households," according to a report by Joanna Stavins, an economist with the Federal Reserve Bank in Boston.

And, Stavins notes, the more credit-card debt one carries, the greater risk there is for delinquency or bankruptcy.

Paralleling that assertion, the Mountain region, including Utah and seven other states, ranks third highest in credit-card debt to household income in a nine-region area, with more than 4 percent of household income tied to credit-card debt.

Delinquency and bankruptcy rates in the region are the highest in the nation.

And despite higher charge-off rates by banks, the report noted that banks dishing out plastic to riskier customers were found to have higher net revenues than other credit-card issuers.

And the effect on the economy?

"Consumer debt levels are clearly very high, up to the upper end of ranges that we had ever really experienced. And now if we begin to have a weak economy, that will begin to be quite painful if we have job losses," Matthews said.

Part of the problem stems from an uneducated public, McCagno said.

"I really have a hard time believing that 19-year-old kids are technically literate in finance," he said. "No one is going to flip over the back page of their statement and read all the guidelines that are back there."

It's a view that Terry Greenman agrees with.

"No one is training people how to handle credit," he said. "The credit-card companies are as bad, in my opinion, as the cigarette companies promoting cigarettes to kids. They don't (care) about you. All they care about is that interest."

E-mail: danderton@desnews.com