Editor's note: Join columnist MP Dunleavey and a group of women as they seek to strip away the myths around money, liberate themselves from debt and find financial sanity. Follow the ongoing quest of the Women in Redevery other Wednesday 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.
Yet at 33, she found herself battling an even more insidious financial burden: Survival debt.
'I'll pay off the card when I get paid'Like many couples, Yalitza and her husband were busy living life and working toward their future when they hit a couple of financial potholes. 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.
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 stuffWe 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 (more than $9,000 by some estimates).
The most stunning number of all was released by the Federal Reserve earlier this year: In 2008, consumer debt hit $2.6 trillion.
(I love dropping the debt figure at parties, 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.
In these harder times, 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, consumers are putting 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. 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.
The worst thing about survival debt is that while you can rein in the debt from those shopping splurges and snazzy trips of times gone by, 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 helpingSome 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 youI 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, Visa, MasterCard, Amex and Discover 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."
Published April 30, 2006