The Graying of Card Debt

  The credit profile of the older debtor is changing as Baby Boomers begin to reach retirement age. How will issuers and their collectors fare with this new breed of cardholder?
  Card issuers typically view cardholders 60 years or older as a mixed blessing. On one hand, these older consumers-many of whom grew up during the Great Depression and World War II-are scrupulous about paying their debts. On the other hand, they rarely carry large balances, making them less profitable to issuers that rely on interest income to build their bottom lines.
  But all of that may be changing. With the graying of the Baby Boomers, those born between 1946 and 1964, the profile of the average older cardholder is beginning to undergo a transformation. This post-World War II generation grew up in a time of economic expansion and increasingly available credit. While their parents might have put $5 a week away towards the eventual purchase of a dining room table or a sofa, Boomers often think nothing of going into a furniture store, slapping down a Visa, MasterCard, American Express or Discover card, and walking out with a $2,000 bedroom set. And many times, it will be months, or even years, before they finally pay off the debt.
  Indeed, only 44% of people ranging in age from 50 to 64 years pay their credit card bills in full each month, according to a recent poll by the Gallup Organization Inc. In contrast, 68% of people 65 years and older pay their bill in full each month.
  "The generation that came out of the Depression were somewhat debt adverse," says Sally Hurme, a lawyer with the consumer-protection division of AARP, formerly known as the American Association of Retired Persons. "But as the Boomers are coming into the older population, they're bringing a lot of their debt along with them."
  The U.S. Department of Commerce's National Institute of Aging estimates that by 2010, the number of people over age 60 in the U.S. will be growing at a rate three-and-a-half times as high as the population at large.
  This changing profile of the typical older debtor could spell trouble as the Boomer generation hits retirement age, says Steve Rhode, president of Rockville, Md.-based Myvesta, an organization that works with problem debtors. Generally, people who are 65 or older have two credit cards and a mere $433 in card debt, he says. In contrast, people who are between the age of 55 and 64 years generally have three credit cards and about $7,000 in debt, he says.
  "Folks that are 65 and older don't necessarily come from a society that was as dependent on credit, but by gosh, the new crop is," Rhode says.
  That means that cardholders may face a retirement where they struggle to pay off large debts incurred during their working years. And many of them will find that expenses that were manageable with a salary are harder to pay on limited income such as Social Security or a pension.
  That will pose special challenges to issuers and the collectors working for them. Bankruptcies are of most concern to card issuers because they account for 40% or more of chargeoffs.
  To be sure, only a small percentage of older consumers have such severe problems that they file for bankruptcy. A study by Hackettstown, N.J.-based SMR Research Corp. of 42,816 randomly selected bankruptcies in June 2001 shows "very little evidence that older people are filing much," says Stuart A. Feldstein, president. SMR is doing a similar analysis of 2002 data, but Feldstein says he doesn't expect to see much difference.
  Hard Times Ahead?
  "The heaviest-filing age group is people 35 to 39 years," Feldstein says, noting that while this age group represented 10.2% of the adult U.S. population, it accounted for 17.3% of filings.
  In contrast, persons ages 65 to 69 represented 4.4% of the adult population, but were only 1.1% of bankruptcy filers. People ages 70 to 74 were 4.1% of adults but accounted for 1.8% of bankruptcies; and people ages 75 to 79 were 3.3% of adults but 1.5% of filers.
  The oldest group-people 80 years or older-were 3.7% of adults but only 0.59% of filers. "The oldest people had the lowest risk," Feldstein says.
  A study by the Executive Office for United States Trustees-the office of court-appointed supervisors of bankrupt estates-reached a similar conclusion after reviewing 5,284 no-asset Chapter 7 bankruptcy filings between 1998 and 2000. That study found that elderly people file for Chapter 7 at about one-third the rate that would be expected by their proportion in the population at large.
  Nonetheless, there are early signs that for many consumers, retirement may not be their golden years. "Debt of all sorts is increasing among the older population," Hurme says.
  There are many factors that portend hard times for some older Americans. For one, nose-diving stock prices are taking a toll on seniors' pensions, 401(k) funds and other stock-market-linked funds that retirees generally use to supplement Social Security. That's left older consumers with sharply lower incomes, turning what should have been comfortable retirements into hand-to-mouth existences.
  "The real story with old people is not so much on the debt side as on the income side," Feldstein says. "You've spent your lifetime trying to save money or build assets. You rely on those assets to supply you income when you retire."
  What's more, lower interest rates are chipping away at older Americans' income. "People who were more careful and put their money in the bank (rather than the stock market) are not happy campers either because the interest rates payable on their savings accounts and their (certificates of deposit) are now down below 2% and so their incomes get pinched," Feldstein says. "It's not a pleasant time to be old, financially."
  Financially strapped companies also are drastically curtailing or eliminating health insurance for their retirees. That leaves older people to shoulder soaring medical expenses at a time when they are encountering more frequent, and more serious, health problems.
  But lower income isn't the only cause for older persons' precarious finances. Many older consumers were "living lifestyles they couldn't afford using borrowed money," Rhode says. Studies may say "precipitating events" such as divorce, illness or injury push consumers into bankruptcy, he says, but "the reality is that those are generally incorrect. Getting injured in a car accident should not throw your financial house into disarray if you miss one paycheck. More and more Americans are living paycheck to paycheck, and all it takes is one unforeseen event."
  Myvesta is seeing senior citizens "coming in with worse and worse situations," Rhode says. He cites one couple, both over 60 years old, that "were struggling to pay their bills. (The wife) wanted to cash out their investment fund to pay off their debts. But when we looked at them, she had $56,000 in investments but they were all bought on margin."
  The end result? "Once she paid back the loan to buy the investments and the tax liability, she ended up with little money," Rhode says.
  Data culled from Chapter 7 filings of the elderly paint an equally dismal picture: they had average gross monthly income of $1,544, more than one-third below the average income for Chapter 7 filers overall. Social Security benefits were the main source of income.
  The U.S. Trustees' study also found that all of the elderly Chapter 7 filers reported at least one credit card, and 35 of 39 had more than $10,000 in card debt. On average, credit card debt levels were a little more than double the filers' annual incomes.
  What is troubling to many is that those who have seen their retirement income dwindle are using credit cards to take up the slack. "Some of the credit card debt is just for day-to-day expenses as well as for health care," AARP's Hurme says.
  The average out-of-pocket expense for Medicare beneficiaries is "about $860 for prescription drugs that are not covered," Hurme says. "It's logical that some of the credit card debt that they are using is to pay for prescription drugs."
  In an effort to handle this growing debt load, many seniors are putting their biggest asset-their home-at risk. "We do know that (home) foreclosures are increasing among the older population," Hurme says. "Older persons are losing their homes because they have tapped into their equity to pay both secured and unsecured debt."
  Lenders offering home-equity or debt-consolidation loans to the elderly often are predatory lenders who charge exorbitantly high interest, which further increases the cardholder's debt burden, she adds.
  Some are critical of what they see as overly aggressive marketing of credit cards to the elderly. Many senior citizens who don't have much cash flow or savings to fall back on are turning to credit, says Jo Alison Taylor, general counsel for the Legal Counsel for the Elderly, Tuscaloosa, Ala. And they have plenty of offers to choose from.
  "We're seeing a lot of people max out on a credit card and go to another credit card and then to another credit card," Taylor says. "I think it is irresponsible (of issuers). The millions of credit cards that go out in the mail are an invitation to a careless use of credit."
  Taylor questions why issuers target older consumers who just cannot pay their credit card bills. The card issuers "must lose millions of dollars because of the sloppy dispensing of credit," she says. "I don't understand what the profit motive is."
  And issuers may find that methods used to collect from younger debtors are ineffective in collecting from debtors in their 60s or older. That's because for many elderly, Social Security is their only source of income, and "you can't garnish Social Security," Taylor says.
  And even if older people own a home, it may already be used as collateral for another loan or have little value, Taylor adds.
  Card issuers try to take into account the unique problems that older people face in paying off credit card debt. But federal law prohibits issuers from discriminating against the elderly, and thus makes it difficult to track older cardholders, says Keith Roever, vice president of credit card collections at U.S. Bancorp.
  However, the elderly exhibit certain financial characteristics that differ from younger cardholders-they don't have alternate sources of income and are unable to get a job because of their age, he says.
  "We definitely take those kinds of things into account when we're trying to determine whether this account should qualify for a hardship program or (whether) we should settle the debt for a lower amount," Roever says.
  Minneapolis-based U.S. Bancorp has no special collections programs for the elderly but most of U.S. Bancorp's cardholders have another banking relationship with the bank or one of its cobranding partners, Roever says.
  "As a result, we try to be very sensitive to each individual's personal needs," he says.
  It is clear that the debt burden of those 60 years or older will continue to grow, in part because people who end up buried in debt often are ashamed to seek help. "Rather than reaching out for help early, they just spend the little money they have," Myvesta's Rhode says, adding "oftentimes, I see the elderly struggling over issues of pride and responsibility and not able to make difficult decisions to protect themselves in the future."
  Meanwhile, many of those people still working and several years from retirement age are continuing to build up debt, thinking they have time to pay it down. "A long-term plan may not be a reality when you've only got a few earning-income years left," Rhode says.
  What percentage of older consumers will end up in bankruptcy is difficult to predict, researcher Feldstein says. "To some extent, they would be shielded from bankruptcy by death," he says. "Not meaning to be morbid, but if you owe a lot of money, then you die, you don't end up in bankruptcy." Issuers, however, could seek payment from a deceased debtor's estate.
  There is no shortage of information for the older population about wise use of credit cards-indeed, AARP, the National Consumer Law Center, the Legal Counsel for the Elderly and many other consumer-related Web sites carry page after page of such information. The question is whether these words of caution are coming too late to Baby Boomers and the increasingly older population.