Fewer people than ever before are diving into the annual, end-of-the-year shopping binge. Retailers have reported unusually low holiday sales for the third year in a row. There are two reasons for this: first, national credit card debt has doubled since 1995, and second, much of that debt has served to buy necessities, not the gifts or luxury items that retailers expect to sell during the holidays. The debt trap is becoming as real for middle and lower class Americans as it is for any third world country–and it’s getting worse all the time.
Americans filed for bankruptcy in record numbers in 1997: 1.3 million total personal filings, up 47% from the previous year, and up 70% since 1994. People are defaulting on their credit card debt, personal lines of credit, and mortgages in record numbers, losing their homes and possessions in the process, losing their ability to hold or find a steady job, and ruining their long-term credit histories. This is the sordid underside of the “economic boom,” and it’s invisible to newspaper reporters and TV camera crews.
For the last decade, wages have stagnated–meaning that most workers have received either no pay raises or only minute increases that haven’t kept pace with rising inflation. The costs of basic necessities are rising beyond our means to pay for them, while companies are contributing to their profits by cutting back on free or low-cost employee benefits: health insurance, retirement plans, dental care benefits, vacation pay, sick leave. Furthermore, our so-called economic boom has been the product of “increased productivity” in the workplace–translated into real terms, this means companies are getting more work out of fewer employees, and paying them less for it. By holding down the cost of labor and benefits (the single largest expense for most companies), corporations increase their profits and are able to pay higher dividends to their stockholders, thereby funneling wealth to the rich and leaving the rest of us squeezed between a rock and a hard place. It’s not surprising that most Americans are using their credit cards to pay for clothing, food, transportation expenses, medical bills, childcare costs, etc.
This cycle of oversupply and underconsumption–where companies produce more and more goods and services, but their workers can’t afford to buy these things–can’t last forever. Yet banks are doing their best to prop up the system by extending credit to as many people as possible, and by trapping them into an endless cycle of deepening debt.
The largest credit card companies are “monoline” banks–institutions that exist only to issue credit cards and collect interest and fees from customers. They have no bank branches, no depositors, no tellers, and provide no other services. Such banks hook new customers by sending out massive mailings offering a new credit card with a low annual interest rate for a limited period of time, which eventually increases dramatically– often to 20% or more. In addition, they charge a whole range of service fees and other finance charges which are often not identified in detail on monthly statements. Customers’ monthly interest payments and service fees are what keep the monoline banks afloat and cover all their expenses; however, to show consistent growth, these banks need to draw in a steady stream of new customers every month.
To entice new customers, monoline banks are relaxing their standards for issuing credit cards. As of May 1997, one quarter of all families in the U.S. with annual incomes below $10,000 owned at least one credit card. Undoubtedly that figure is higher now. When banks turn to the portion of the populace least able to pay, you know that something is terribly wrong. In this case, large creditors like MBNA America, First USA, and Advanta, are scrambling to keep afloat and avoid bank defaults similar to those currently plaguing Japanese, Thai, and South Korean banks and credit houses.
While the International Monetary Fund and the World Bank eagerly jump in to bail out banks when they fail, there’s no corresponding help for you and me when we can’t pay off our credit cards. Nevertheless, there are some steps we can take to get out of debt without destroying our credit history or losing most of our possessions.
First of all, we need to collectively push for wage increases and full benefits from our employers. For most of us, that will mean organizing our own unions, setting up a workers’ collective, fighting for increases in the minimum wage, or for laws that require employers to provide basic benefits to workers. We all need to support an international movement for increased wages, benefits, safety laws, and workers rights. This is, of course, a long-term solution.
In the short term, there are practical things you can do to scale back your own debt. First of all, stop buying things on credit and restructure your existing debt. Take all of your credit cards out of your purse or wallet and figure out which one charges the lowest rate of interest. Put that card in a drawer and save it for emergencies. Now transfer the outstanding balances from all of the other cards to the card with the next lowest rate and put that card in the drawer, too. Cut up all of your remaining cards and call the 800 customer service numbers printed on each billing statement to close out those accounts.
When the statement for your remaining two cards arrive in the mail, calculate your monthly payments as follows: add the interest (sometimes listed as “finance charges”) to the amount listed as “minimum payment due.” This way you will always be paying off your interest for that month, and your minimum payment will always pay off some of the principal (the money you originally borrowed). Now, if the total of those two numbers is not too high, add as much extra into the payment as you can manage: $5, $10, $50, whatever is reasonable. The more extra you pay on the principal, the faster you’ll pay off the loan, and the less interest you will pay next month. Never pay only the minimum amount. Credit card companies always suggest an insufficient payment so they can hook you deeper into debt and make you pay more interest. That’s how they make their profit.
If your interest payments are high, you should shop around for a card that offers a lower rate. Take advantage of mailings that offer low introductory rates, and transfer your balance to a new card (always cut up the old card and close out the old account afterwards). The month before the interest rate is due to increase, transfer your balance to another new card with a low rate, and cut up the old one. Rotating your debt takes a bit of work and attention, but you can save a lot of money. Don’t feel guilty about doing this–even at the lower rate, the credit card company still makes a generous profit from you for doing nothing more than sending you a monthly statement.
Finally, throw away those sexy mailings that say 0% interest (an outright lie), credit line up to $100,000 (another lie for most people), or 5.9% fixed APR (the worst lie of all). Unless you need to rotate your shrinking debt, you don’t need a new credit card. Credit card companies only woo you so shamelessly because they need you so desperately. Let them starve–they’ll only do the same for you … if you let them.