Who's Afraid Of Credit Cards?

Debunking the dangers of plastic

Is there a growing risk that the double-digit surge in credit-card debt since mid-1994 will trigger a consumer-debt crisis that will end the current cyclical expansion? Some experts, pointing to the aggressive marketing of credit cards in recent years, the relatively high delinquency rates on credit cards, and the surge in personal bankruptcies, are convinced there is.

Economist Robert E. Mellman of Morgan Guaranty Trust Co., however, is skeptical. For one thing, he notes that credit-card debt is less than 4% of household liabilities. Even factoring in home mortgages and other forms of borrowing, total consumer debt has actually been rising lately at 7% a year, compared with 11% in the upturn of the 1980s. And that has happened while the buoyant stock market has bolstered the asset side of consumer balance sheets.

Corroborating evidence comes from the newly released results of the Federal Reserve's latest (1995) survey of consumer finances. It indicates that the ratio of total household debt to household financial assets has declined--from 53.4% in 1992, the year of the previous survey, to 46.9% in 1995.

Furthermore, the survey shows that the median unpaid credit-card debt of all families with such debt rose by only $400 (in 1995 dollars) from 1992 to 1995. Assuming an average 15% interest rate on these balances, Mellman calculates that the rise in the average monthly interest payment over those three years comes to just $5 a month--"hardy the making of a financial crisis."

More important, the biggest increase in credit-card borrowing was posted among families in the $50,000 to $100,000 income class, where the portion of those with such debt rose by 11.5 percentage points--from 51.3% in 1992 to 62.8% in 1995. That compares with increases of only a percentage point or two among families with incomes below $50,000 (chart). In other words, card issuers seem to have mainly courted those families with the wherewithal to repay their balances. "Issuance of greatly increased credit to high-risk cardholders appears to have been the exception and not the rule," Mellman says.

To be sure, the Fed survey was conducted in 1995 and there has been been a further rise in household debt levels and credit problems since then. But Mellman notes that credit-card companies have also become a lot less aggressive in recent months and that credit-card debt growth has slowed. "That points to an easing of debt problems before too long," he says.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE