High Debt Haunts Consumers Spenders Succumb To Easy Credit, Pile Up Debts That May Take Years To Pay Off

Sandra Winn was married to a successful doctor, accustomed to a nice house, vacations and $12,000 annual clothing allowances. She maintained that lifestyle with nearly a dozen credit cards after divorce diminished her income.

Patricia and Christopher Duran also borrowed heavily, but mainly because poor budgeting and Christopher’s job loss left them unable to afford the mortgage, legal bills and food for their four children. They eventually ran up $47,000 in credit card debts.

Both of these households are frantically trying to cope with debt. Thousands more are joining them.

Americans from all economic walks of life are sinking into their own black hole of debt, going into hock for everything from Baccarat crystal to breakfast cereal.

Overall consumer debt has surged 39 percent in the last five years and now totals more than $1 trillion, a sum that exceeds the annual economic output of many nations.

This could be a time bomb for the U.S. economy and its banks: If overextended consumers curb spending - as they did this past Christmas - or if they default on loans, a recession could result.

“When you carry this much debt it’s scary,” said Madelyn Hochstein, whose studies on consumer spending for the market research firm DYG Inc. reveal that many Americans are borrowing just to supplement incomes. “There’s a movement … to a less secure economic world.”

Nearly 4.25 percent of credit-card loans were written off as losses late last year, up from 3.8 percent a year earlier. Personal bankruptcies rose about 6 percent nationwide in 1995.

Record consumer borrowing has forced banks and other financial institutions to build reserves against possible losses. BankAmerica raised its loan-loss provision 30 percent in the fourth quarter; Fleet Financial Group raised its reserves by 53 percent; and Dean Witter, Discover & Co. added another 38 percent to its reserves.

Most economists say the banking industry isn’t in any imminent danger. Loan losses, a closely-watched barometer, are still below levels of the 1990-91 recession.

But Michael E. Staten, executive director of the Credit Research Center at Purdue University, said losses eventually could rise because loan delinquencies are increasing.

Delinquent or not, many consumers feel more stress because of debt.

In the past, families would borrow to buy a car or send kids to college. Today, they’re borrowing to gas up the car or send kids to the pediatrician.

The Durans found themselves in the hole from borrowing that way.

Mrs. Duran, a 54-year-old elementary school librarian, admits poor budgeting and overspending helped precipitate their woes. But she said the demise of her husband’s architectural business and ensuing legal problems forced them to find a quick fix.

For a while she waylaid bill collectors by paying old credit cards with cash advances from other cards or by transferring balances to new accounts.

Unable to continue this scheme forever, the Durans lost their home.

Credit cards caught up with Winn in a similar way. The 49-year-old registered nurse amassed $40,000 in bills on 10 cards after her divorce, an amount equal to her annual pay. She borrowed to remodel her home, buy furniture and clothes and eventually, food.

“I had a standard of living to maintain,” said the mother of two teenagers. “It was obviously a very foolish thing to do.”

Once a consumer runs up big debts, it’s hard to pay them down.

Consider what happens when only the minimum payment is made every month, a common practice among many cardholders. On an $1,800 balance at 18 percent interest, it would take 22 years and four months to pay. The interest charges would total $3,797, making your total payment $5,597.