Consumers Enter Holidays Already Maxed-Out Millions Near Their Limit On Credit Cards

Millions of consumers are heading into the holiday season dangerously close to their credit-card limits, causing concern among economists and credit counselors that some shoppers will have a red-ink, rather than a white, Christmas this year.

“A lot of people are bumping up against their limits to spend,” said Warren Heller, research director at Veribanc Inc., a bank research and rating firm based in Wakefield, Mass.

The high consumer-debt levels could hurt retailers as well, retail analysts said, if shoppers become reluctant to pile more debt on their loaded-up credit cards.

Today is considered the official start of the holiday shopping season, during which retailers on average derive more than half of their annual profits.

Several economic barometers - including delinquent credit-card accounts - indicate that if the economy takes a turn for the worse, many consumers will find themselves buried by debt, with no foreseeable way to dig out.

The consumer debt that worries experts involves charges on revolving credit cards and lines of credit that are not paid off each month.

“There is some worry that consumers have built up too much debt,” said James Chessen, chief economist for the American Bankers Association. “And, as the holiday season approaches, people make more purchases than are prudent.”

The debt indicators that worry experts include:

Total credit-card debt rose 21 percent, to $195.2 billion at the end of June, the latest period for which figures are available, from $160.6 billion a year earlier, Veribanc reported.

For the second quarter, the percentage of credit-card accounts that were 30 days or more overdue rose to 3.26 percent from 3.18 percent, according to the ABA. In the past 10 years, bank-card delinquencies have been higher only three times - 3.28 percent in the second quarter of 1986, 3.34 percent in the first quarter of 1991 and 3.29 percent in the fourth quarter of 1991 - a year when the economy was in a recession. The monthly rate was even higher, hitting 4.33 percent in October.

Bankruptcy filings for the second quarter of 1995 increased 8.8 percent over the same period in 1994, according to the American Bankruptcy Institute. In the past year, the number of bankruptcy filings rose 1.5 percent, reversing a downward trend.

While Federal Reserve figures released recently indicate a slowdown in credit-card activity, consumers have added more debt this year than in any year since 1989, according to Robert B. McKinley, president of RAM Research Group, based in Frederick, Md.

Delinquency rates rose nearly 3 percent last month for the largest single monthly gain in five years, McKinley said. Overall credit-card delinquency now stands at 4.33 percent, the highest level since November 1993.

“There is very definitely a reason to be concerned,” McKinley said. “It will be interesting to see how it goes with this Thanksgiving weekend.”

William Ford, senior economic adviser to TeleCheck Services Inc. Houston, which does monthly surveys of sales at 15,000 retailers nationwide, said he expects consumers will be especially price-conscious in the coming month, which could hurt the profitability of retailers forced to discount merchandise.

Not only are consumers insecure about the economy and their jobs, he said, but they also are concerned that they won’t be able to pay off their holiday bills in January.

Consumer debt has risen faster than income, making it tough for some people to meet all of their obligations. Those factors, combined with a weakening economy in some parts of the country, will cause delinquencies to continue to rise in the next year, Chessen predicted.

And, consumers shouldn’t kid themselves into thinking heavy debt loads are just a temporary condition, experts said.

In a survey last year, the ABA found that seven of 10 shoppers using credit cards to make holiday purchases planned to pay off their holiday debt in two months or less. But in reality, the average shopper takes up to six months to pay off Christmas bills.

It is during the holiday shopping season that most consumers load up on debt. Last year, Americans spent $76 billion on holiday gifts, according to the Consumer Credit Counseling Service of Greater Washington (CCCS), a non-profit group that helps consumers manage their debt.

“Without paying close attention, holiday debt can skyrocket into a problem that will last long after the holiday season is over,” said Joanne Kerstetter, president of CCCS.

So far this year, the average consumer is carrying a credit-card balance of $3,900, according to Bankcard Holders of America, a consumer credit education group in Salem, Va. Last year, the average balance for consumers - including holiday purchases - was $3,300.

“We tend to get generous around the holidays, whether we can afford it or not,” said Ruth Susswein, Bankcard Holders of America’s executive director. Susswein said that so far this year the number of consumers her group has counseled has increased 36 percent from last year.

Susswein warns that credit-card debt is overwhelming many consumers. A recent survey found 65 percent of consumers believe they’ve taken on too much personal debt in the past year.

Susswein said banks are reacting to the debt pileup by raising interest rates for consumers with heavy debt loads and tacking on penalties for those consumers who exceed their credit limits or pay bills late.

“With one hand, banks push cardholders to charge more and carry a balance; with the other hand, they slap consumers with unprecedented rate hikes,” she said.

But credit-card issuers argue that consumers want the convenience of using plastic and they only assess penalities or raise interest rates for those borrowers who pose the greatest risk of not paying their debt.

One reason for the added debt is the rise of credit-card use for convenience shopping and a greater acceptance of plastic. For example, Visa U.S.A. reported that payment volume for health-care services grew by 38 percent between mid-year 1994 and mid-year 1995. Visa’s annual health-care volume is expected to reach $6.8 billion this year. Visa expects supermarket volume to top $10 billion by the end of the year, compared with $600 million in 1990.

Despite the heavy debt load consumers are carrying, however, credit-card companies appear ready to give shoppers credit power to load up their Christmas shopping bags, Chessen said. The offers for credit cards with low teaser rates continue to be stuffed in mailboxes alongside holiday catalogs.

“That spigot isn’t going to be turned off completely,” Chessen said.