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Interest payments gobble income More of your money in '95 was used for installment debt


When it came time to pay the monthly bills last year, consumers doled out slightly more for cars and clothing and a whopping amount on one item that gained them neither cars, clothes nor other creature comforts. A bigger part of their money went toward paying interest.

While consumers spent 1 percent more on cars and 4.4 percent more on food, they spent 12 percent more on paying installment credit, excluding mortgage interest, the latest Commerce Department figures show. For the last five years, the amount of interest paid by consumers had been relatively flat. Then in 1995, it jumped from $117.2 billion to $131.7 billion.

"Americans are really bad at handling their personal finances," said Bernard L. Weinstein, director of the Center for Economic Development and Research at the University of North Texas. "People aren't paying off their credit cards. The banks and credit unions and other issuers of credit cards are going crazy again. The more you pay in interest, theoretically, the less you have available for new purchases."

In recent years, interest payments generally increased less than spending. When people shopped, they paid for purchases with cash or promptly paid credit-card balances so that interest didn't accrue. In 1994, according to Commerce Department figures, interest began edging up. Last year, the increase was over the charts.

Interest rates rose slightly at the beginning of last year, which could have increased payments. Banks and others churned out credit cards at an amazing rate, providing even more credit to Americans.

Then consumers embarked on a record borrowing spree, although not necessarily a buying spree, that continues today. While consumption increased 5 percent last year, income handed over to interest payments grew 2 1/2 times faster, according to Commerce Department figures.

Not only are consumers borrowing at record levels. In many cases, they aren't paying off their balances, as Mr. Weinstein suggested, allowing interest to accrue. Consumers may still be paying interest from previous years' purchases.

Also, incomes have risen so slowly that some consumers are using credit cards to make ends meet. They let interest add up because they don't have enough cash to make payments.

"People are living beyond their means," said David Wyss, research director of DRI/McGraw-Hill. "People kept their standard of living up by using credit cards more. This has been trending up since the end of 1992."

Joan Sutherland knows firsthand about the problem. A legal secretary in Dallas, the 42-year-old mother of three said she piled up more than $2,000 in debt at Christmas and probably will be paying for it for years. She uses credit cards more frequently now, she said, because she doesn't have enough money to buy what she wants.

"I know I'm paying more interest," she said. "I know because I got two more credit cards last year, and they're just about charged up, too."

Kevin Kelly, 38, a computer programmer in Dallas, said, "I used to always pay them off until I ran out of money. It's kind of spooky when they go, 'Here's your automatic $5,000, $6,000, $7,000 limit.' You could do some real damage."

Americans' debt soared 13.9 percent in February, the most recent data available. Consumer installment credit shot up by $12 billion, boosting consumer debt to $1.048 trillion.

Revolving credit, which includes credit cards, jumped $6.4 billion, pushing total revolving debt to $407.2 billion.

If the amount of borrowing increases, then the amount paid in interest generally also will increase. More interest is paid on $10,000 than on $1,000.

Interest also is piling up because people no longer pay off their balances, said Jerry Donahoe, associate director for national economic accounts at the Commerce Department. "They're rolling it over more."

If consumers only make the minimum payment on their credit-card balances, interest will pile up at an astronomical rate. By paying the minimum $36 a month on an $1,825 credit card balance, it would take more than 22 years to pay off the debt and interest. And that would be if nothing else was ever charged, according to the Bank Cardholders of America.

Mr. Donahoe also said that more people are working, 2.6 million more last year than in 1994, adding to the numbers of people who will have credit cards and subsequently more interest and debt.

"That may lead people to feel they are in a better position to take on debt," Mr. Donahoe said. "It may just be that people felt more inclined to charge things, and it may be that they just financed a larger share of the increase in consumer spending than they had in earlier years."

There's also tremendous competition between credit card companies trying to lure new customers with low introductory rates, no annual fees and the chance to gain airline frequent flier miles. Last year, the average U.S. household received more than two dozen of the more than 2.5 billion credit card solicitations mailed.

"I get about five (solicitations) a week," Mr. Kelly said.

Michael Myer, 39, another computer programmer, said, "Mine have come down to about five or six a month." He said he's gotten rid of all of his credit cards.

"You get in trouble with them," said Mr. Myer, who said credit card companies hounded him for payment at one point. "I said I'd pay them off, and that's that."

Banks wouldn't send out the millions of solicitations "if we didn't think there were that many creditworthy customers out there," said Dan Friel, director of financial and economic analysis for NationsBank. "It's also a profitable line of business."

Credit card balances are only 4 percent of NationsBank's assets because the bank historically has concentrated on commercial business, Mr. Friel said. "Although the dollar amounts are still pretty substantial." He wouldn't disclose those amounts.

Consumer spending says a lot about the economy because it constitutes two-thirds of the nation's gross domestic product. If people spend a lot, the economy does well. If they don't, there's usually trouble. Paying interest, rather than buying new goods -- and services, does little to help the economy grow.

In 1995, for example, spending on clothing and shoes increased only about half of what it had in previous years. The apparel industry was thrust into turmoil with numerous bankruptcies and consolidations of large and small retailers.

Pub Date: 4/22/96

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