The average American credit card holder is $14,000 in debt. That's where Cambridge Credit Counseling comes in, which aims to raise financial literacy among the masses. The non-profit, which has more than 180,000 clients nationwide-a fraction of the 3.5 million on debt-management plans-helps consumers restructure payments to avoid bankruptcy. Are banks part of the solution or part of the consumer-debt problem?
USB: What are the biggest trends you're seeing?
Viale: Right now, consumers are leveraging their homes at such high rates to pay off their credit cards. There aren't any recent statistics, but in 2001, the Consumer Bankers Association reported that 52 percent of equity loans and 47 percent of equity lines of credit were used for debt consolidation, an all-time high. According to Collections Industry.com, 26 million homeowners were signed up for equity loans and lines of credit for a total of over $850 billion, as of 2003. We're also seeing a lot of people who are buying things they can't really afford, lured by [the promise of] no payments for six months or a year.
USB: How much credit card debt is America in today?
Viale: The average household has seven credit cards and carries a credit card balance of $14,000. A small percentage of consumers-18 percent-pays it off every month. The most alarming statistic, though, is that one out of every three to four households is either behind or over the limit on at least one account. That's 35 million households having difficulty paying their credit card debt. And only 28 percent of the population has a credit score of between 750 and 799.
USB: Is there an "acceptable" level of consumer debt?
Viale: As of December 2003, the debt-service ratio was at 13.3 percent, meaning that 13.3 cents of every $1 of people's income was committed to debt. In 1993, this ratio was 10.84 percent. The previous record was 12.5 cents in 1986. Today, unfortunately, consumers save an average of two percent of their income. An acceptable amount of debt would be one that is greatly exceeded by savings.
USB: In the third quarter, consumers pushed spending up 4.6 percent, but their after-tax income grew only 1.9 percent. Can we expect more personal bankruptcies in 2005?
Viale: Without a doubt, especially because consumers are leveraging their homes where there is no equity left. Our 2004 Home Equity Study shows that 38 percent of HELOCs (home equity lines of credit) and 52 percent of home-equity loans are used to refinance debt, mostly credit card debt. The problem with consumer spending is that there's no education as to why that situation happens in the first place. Non-business bankruptcy filings represented 404,543 in the second quarter of 2004, compared to 335,578 in the second quarter of 1999, an increase of 20.6 percent in five years.
USB: Are more consumers choosing credit counseling services over filing for bankruptcy?
Viale: Yes. There are about 3.5 million consumers on debt-management plans. Our company has seen a doubling of calls from people looking for advice. In 2003, we got about 20,000 calls a month; in 2004, it's been 35,000 to 45,000 a month. We only enroll 10 to 15 percent of the people who call. Consumers are using credit cards to keep themselves afloat, to maintain their lifestyles. We used to see loss of job, medical expenses or something else that puts them over, but now we're seeing them continue to use credit above their capacity to spend. No one budgets. Of the 40,000 who call us, less than five percent have created a household budget. They should aim for a budget with rent or mortgage payments as 35 percent of take-home pay; travel and commuting as 15 percent; debt servicing as 15 percent; savings as 10 percent; and other expenses as 25 percent.
USB: What responsibility do banks have, if any, to educate consumers to manage their personal finances?
Viale: I don't know where it's going to play it out. ... There needs to be more disclosure from banks and a better education system in the schools. ... In California, they wanted to put a notice on the back of credit card statements as to how long it would take to pay off a bill if you only paid the minimum balance, but that was shot down. In the regulatory scheme of things, unless there's a change of the guard on behalf of the consumer, you won't see any change. Consumers who aren't frustrated [with high fees] are naive or don't understand the situation. ... It's our society and we need to teach our people how to spend. The fiscal responsibility of financial wellness is just not taught. So you couple that together with aggressive marketing and easy available credit for consumers and you have a serious debt issue.
