WITH bankruptcies at record levels and delinquencies near all-time highs, you'd think that all of America was in credit hell. But you'd think wrong.
Most borrowers are doing fine and will manage even if the economy dips, says Sandra Shaber, executive vice president of global markets for the WEFA Group in Philadelphia.
Some people do indeed overborrow. But there's no reason to think there's a larger-than-usual portion of spendaholics today.
The new risk lies with the growing number of borrowers who haven't had much credit before. Competition among lenders, plus the good economy, is encouraging lending to financially marginal groups.
Many of these individuals will also use their opportunities well, but they are more vulnerable than others when a downturn hits.
Careful lenders work hard at finding the better prospects among these new borrowers. But those customers may go under, too, if tTC they're later overloaded with credit by irresponsible lenders.
Here's the lending industry's system for extending credit to virtually anyone who breathes:
Go after "subprime" borrowers. They have tarnished credit histories or none at all. They're a bigger risk, hence are charged high interest rates.
On the bright side, subprime lending can help people dig out of a hole. If they use their new credit wisely, they'll eventually qualify for lower rates.
On the dark side, these borrowers are more vulnerable to bankruptcy if the economy slows.
Go after low-income borrowers. The largest growth in consumer credit in recent years has been among the poorest Americans.
The burden of debt, relative to income, has risen the most for people earning less than $10,000, according to the Federal Reserve's Survey of Consumer Finances for 1995 (the most recent date). For those earning more than $50,000, the debt burden is down.
Find kids. Cards are available to almost every college student -- no income, no credit history, no parental consent required. For some students, this is an ideal way to get a credit life. Others fall behind on their payments, marring their credit reputations for years to come.
Feed gamblers. Lenders make it easy for addicts to borrow by putting ATMs in and near casinos.
Find bankrupts. Bankruptcy used to wipe out your access to serious credit for many years. Now you're considered a worthwhile risk. Your old debts are off your back and you won't be allowed to go bankrupt again until seven years have passed.
Find the chronic borrowers. Credit-card issuers earn about 75 percent of their revenue from people who don't pay in full each month. You keep rolling over your debt, paying interest as you go.
Lenders especially like customers who pay the minimum -- typically, 2 percent of the bill. If you owe $3,000 at 18 percent interest, and pay only the minimum each month, it will take nearly 31 years to clear that debt.
Why does it take so long? Because every month you're asked to pay less: say, $60 when you owe $3,000 but only $10 when your debt is down to $500. That keeps the debt alive.
Pump up home-equity lending. These are loans against the value of your home. You can use them to refinance credit-card debt at a much lower interest rate. Some banks will lend 25 percent or 50 percent more than your house is worth, giving credit-hungry people access to large amounts of money.
Keep interest rates high. On average, credit cards are twice as profitable as all other banking activities, says Mark Zandi, chief economist for Regional Financial Associates in West Chester, Pa. Lenders can make tons of money even with delinquencies at or near record levels, as they've been over the past 12 months.
Washington Post Writers Group
Pub Date: 5/18/98