From The Wall Street Journal today:
NEW YORK -- Karen King owes nearly $36,000, more than she's ever earned in a year.
All day long, bill collectors call. She hunts for a second job, sometimes skips meals, and stays with other family members at a grandfather's crowded apartment, trying to get out of debt and turn her life around.
She largely holds herself at fault. "Years ago, I lived for now. It was so stupid," the 28-year-old says. "It's depressing, but I can't live that life anymore." Now, she says, "I basically want to live for the future."
The recession has forced a financial reckoning for Americans across the income spectrum. The pressure is especially acute for the low-income Americans who relied on borrowing for daily expenses or to gain the trappings of middle-class life. Shifting credit practices over several decades had enabled them to live beyond their means by borrowing nearly as readily as the more affluent.
But the financial crisis and recession have reversed what some economists dubbed the "democratization of credit," forcing a tough adjustment on both low-income families and the businesses that serve them.
"We saw an extension of credit to a much deeper socioeconomic level, and they got access to the same credit instruments as middle-class and mainstream Americans," says Ronald Mann, a Columbia University law professor. Now, "it will be harder for families at the bottom of the income ladder to get credit cards," he says.
The financial crisis has forced lenders to be especially cautious with the riskiest borrowers, a category that low-income families often fall into because their debt tends to be higher relative to income and assets. The ratio of credit-card debt to income is 50% higher for the lowest two-fifths of Americans by income than for the top two-fifths, Federal Reserve data show. Mortgage defaults also occur with greater frequency among the lower incomes.
For families with incomes between about $20,500 and $37,000, the ratio of debt to assets rose from 14.4% in 1998 to 18.5% in 2007 -- more sharply than the increase in the overall population -- according to the Fed's Survey of Consumer Finances. In addition, a full fifth of defaults and delinquencies on first mortgages have been by borrowers earning under $30,000, the highest rate among income groups, according to data from Equifax and Moody's Economy.com.
The democratization of credit began decades ago. Federal legislation in the late 1970s required banks to avoid discriminatory lending and meet the needs of local communities, spawning a wave of home buying and entrepreneurship in lower-income neighborhoods. The rate of homeownership in families with incomes in the bottom two-fifths rose to nearly 49% by 2001 from below 44% in 1989, according to Fed data analyzed by Mr. Mann at Columbia.
Credit-card borrowing took a similar path. One cause was a 1978 Supreme Court decision that let banks charge whatever interest rate was legal in the state where their card operation was headquartered. The ability to charge higher rates made it more profitable to offer cards to risky borrowers. Adding oomph to both credit-card and mortgage lending was the growth of markets where lenders could sell their loans.
By 2007, 35% of Americans in the bottom two-fifths of income had a credit card with a balance, up from just over 21% in 1989. And use of these cards increased. Their median balance on the cards, adjusted for inflation, grew 180% over that period for people in the bottom fifth of income and 80% for those in the next higher fifth.
When the recession struck, banks that had eagerly wooed new credit-card customers reversed course. "Rather than keeping accounts that have high loss potential and limited revenue opportunity, the mission becomes to close out those customers' active lines and drive them off the books," said a report from TowerGroup, a research firm. By June 2009, banks were closing credit-card accounts at a rate of 14% or 15% annually, double the rate of a year earlier.
Government policy, in some ways, has reinforced lenders' business imperative to pull back. A new credit-card law limits banks' freedom to raise interest rates without 45 days' notice. Anticipating this and other changes, card companies took aim at delinquent accounts and shed customers deemed most at risk of default, says Chris Stinebert, president and chief executive of the American Financial Services Association, a trade group. "Banks and credit issuers are looking at their own debt and trying to collect as much as they possibly can," he says.
Backers of the card legislation say one goal is to erect some obstacles to both the lending and the borrowing excesses of recent years. Treasury Secretary Timothy Geithner, testifying before Congress in July, said: "We now know that millions of Americans were...unable to evaluate the risks associated with borrowing to support the purchase of a home, a car or an education."
All this means a new reality for consumers like Ms. King. Most of the credit cards she had were maxed out by 2004. She would sometimes just let the bills pile up and not pay the minimum. "I would start paying it, and then my sister almost got evicted from her old apartment, or my grandfather decided he couldn't pay the rent. They needed help," she says.
Later, the store cut her work hours. As she fell further behind, issuers canceled her credit cards and handed the debts over to collectors. Ms. King's credit score slid to 576, a level that deems her a high-risk borrower.
Last fall, wanting to buy gifts for her mother and sister and clothes for a young niece, she applied for credit and was rejected at Macy's and Dress Barn, finally getting a card with a $250 limit at the Children's Place.
Her biggest chunk of debt, $26,000, stems from student loans to pay for her two-year associate's degree from a community college -- loans now in the hands of collectors. The remaining $10,000 or so includes old credit-card balances, debt to a store that rents furniture, utility bills and back taxes. Another obligation is $400 a month she contributes to the rent on her grandfather's two-bedroom apartment, where her mother, uncle and sister also live.
Ms. King's father died when she was four, and her mother reared her and two siblings. A basketball star in high school, she was the first in the family to pursue higher education. She got her first credit card when she began college and was working at a fast-food restaurant. But, she says, she never learned how to mind a budget.
Legislation passed this year will require that when banks issue a credit card to someone under 21, a parent or guardian must co-sign and have joint liability.
Out of college and working at the shoe store, Ms. King kept up a busy social life, eating out several times a week and going to movies -- even as the collectors called. But she lost the shoe-store job in January, and then learned that a prospective new employer had rejected her after running a credit check. Fearing her credit record would trip her up again and again, she resolved to fix her financial mess.
Gone are dinners at Red Lobster and Olive Garden and purchases like new basketball shoes. She has a part-time job as a tour-bus driver that pays $13 an hour plus tips. She held a second part-time job, in telemarketing, for several months, but it was on suburban Long Island, and getting there, using both the subway and a commuter train, finally became too much. She now is looking for a second part-time job closer by.
One day, when the subway to her tour-bus job was rerouted, she had to take a taxi. She watched the meter anxiously the whole way, groaning when she had to hand over a $12 fare.
With the aid of a financial counselor provided by a nonprofit, Ms. King is applying triage to her debts. "First, I want to take care of all the little things," she says, "and then the student loans."
When a utility to which she owed $300 offered to settle for less, Ms. King says, she declined, because she was told an overdue bill takes longer to come off a person's credit report when it is settled for a partial payment.
She rejected any idea of a bankruptcy filing for the same reason. "It takes forever to come off" the credit report, she says.
To help people like her, several American cities have added financial counseling centers. In New York, their clients' average debt is $18,000, and half have incomes under $10,000. Counselors work with families to follow a budget, imposing choices they may not have had to make in years.
On a warm day, Ms. King ducked into a bodega, H&M Madison Express. She allowed herself a bottle of water, skipping a snack, unlike in the old days.
Decisions like that add up, said the bodega's manager, Hekmat Mustafa. Until 11 months ago, he accepted credit cards, but with fewer customers using them he stopped, to avoid a monthly fee and small fixed fee on each tiny purchase.
"The rise I see now is in food stamps, even from teenagers," Mr. Mustafa said. The number of food-stamp recipients was up 22% in June from a year earlier.
As he spoke, two customers walked in, both to buy individual cigarettes for 50 cents. Not long ago, he said, they would have bought a pack, for $9.
At the other end of the retailing spectrum, Sears Holdings Corp. last year began promoting its lay-away program to enable credit-deprived families to continue to shop.
In Ms. King's world, she says, "all of my friends are going through the same thing I am."
It looked that way at a cookout she held in late summer -- potluck, to save costs. Her younger sister, Janice, said she was also awash in debt, from medical expenses and a bad shopping habit. She has a part-time job at a supermarket. Their mother, also named Janice, left her apartment amid mounting utility bills and moved in with her father and daughters. She is trying to pay off $5,000 of debt so she can rebuild her credit and get an apartment of her own.
A 22-year-old friend, Norman Broggin, lost his job at the same shoe store as Ms. King in the spring. He said he had no money to socialize anymore. Looking around at the laughing group, he said it was the first time they had been together in a long while. Before, "we would hang out every weekend," he said. "Get a drink at a nice bar, eat dinner at a nice restaurant. We don't do anything anymore."
Some are turning to wherever they can for credit. A publicly traded pawnshop chain, EZCorp., reported a 37% rise in revenue in the second quarter. "With credit limited and other options disappearing, there are people looking for somewhere they can get emergency cash," said David Crume, president of the National Pawnbrokers Association.
Cash-strapped workers have long obtained advances through "payday loans," available at storefront lenders for fees that equate to high annual interest rates. Even that move is not so easy now. "More customers are walking in the door, but turndowns are up," said Steven Schlein, a spokesman for the payday-loan industry's trade group, the Community Financial Services Association of America.
Federal Reserve data show that the use of credit cards has been eclipsed by use of debit cards, which don't entail a loan.
Sometimes, in spare moments between work and commuting and budget calculations, Ms. King flips through a photo album that records her old life: house parties, birthdays, pro-basketball games.
"I was a social person, I had interest in a lot of things," she says. "I had dreams. Now I'm just paying off the past."