Credit card companies often first to go unpaidby Leslie A. Pappas on Jan. 31, 2008, under Edge
Patrice Lucas had good credit and paid her bills on time.
Then she lost her research job at DuPont Pharmaceuticals when Bristol-Meyers Squibb Co. bought the company in 2001. Soon she was draining her 401(k) savings to “get through some tough times.” As she fell further behind, she let an out-of-control credit card go into default.
“I’ve gone from a high-paying pharmaceutical job to a low-paying animal hospital job,” she said. “Now I’ve got no savings. I’m living month to month, paycheck to paycheck.”
Like Lucas, an increasing number of people are living close to the edge. Many are employed but have little, if any, savings. The price of gas, health care and food has soared, while wages have stagnated, making it harder than ever to get ahead. The growing fear of recession and resulting job cuts exacerbate the problem.
Economist Dean Baker, co-founder of the Center for Economic and Policy Research in Washington, D.C., who sees a recession coming in 2008, said: “I think people are really hitting the wall.”
Indicators are popping up everywhere:
• Holiday retail sales came in far lower than expected, showing consumers are scaling back on spending.
• Credit card debt shot up by 11.3 percent in November – a six-month high – indicating shoppers relied heavily on cards to finance holiday purchases.
• Banks are bracing for dismal earnings reports and have upped their reserves for soured loans as more 30-day and 60-day delinquencies ooze into default.
• AT&T is seeing a slowdown in sales, largely from unplugging home phone service for nonpayment.
All of this adds up to hard numbers seen in a recent Online Resources Corp. survey of more than 1,000 U.S. households. One out of four households was late on at least one monthly bill by 30 days or more. Forty-three percent say it’s harder to meet their financial obligations than it was a year ago.
The survey was conducted online in October, drawing on what Online Resources called a nationally representative sample of 1,006 households.
To be sure, the Chantilly, Va.-based company helps provide online bill paying for its customers and plans to use the survey results to show prospective clients that people are more likely to pay late bills if they can do it online. But the survey also maps out a wider trend in America’s bill-paying habits.
“Households are being forced to prioritize among their bills,” the report said. “They are managing their delinquency by creating, in effect, a ‘delinquency budget.’ ”
‘We can’t lose our jobs’
More than a third of households (34.5 percent) said they would let their credit card bill slide in order to pay more essential bills, such as a mortgage, the survey said.
Credit card issuers do collect late fees and big interest payments, but that won’t cover the ultimate loss.
“Credit card issuers are built on the model that consumers pay their bills,” said Bruce Cundiff, a senior analyst with Pleasanton, Calif.-based Javelin Strategy and Research. “If they can’t pay their bills, they can’t pay their interest.”
Tony Croce, a refrigeration technician in Newark, is up to date on his bills and said the money he and his wife earn is enough to send their two children to private schools.
But they don’t have enough left over to put into savings, and holiday spending recently ran up the balance on one of his credit cards. Without two salaries, the family wouldn’t be able to cover the monthly bills, Croce said. “So we can’t lose our jobs.”
If savings are any indication, the Croce family situation is common. Personal savings as a percentage of disposable income slipped into negative territory in November, dropping to minus 0.5 percent, according to the most recent figures from the Bureau of Economic Analysis.
A recent report by New York-based public policy group Demos found 21 percent of middle-class families have less than $100 per week left over after paying essential living expenses. Excluding home equity, more than half of middle-class families have no financial assets at all, or debt levels that exceed assets.
High energy costs, budget woes
The rising cost of energy is one factor increasingly putting families into the red.
Gasoline prices bumping up against $3 a gallon are hurting virtually anyone who has to drive. The cost of natural gas, propane and heating oil continues to rise, making it tough to keep the thermostat up.
In the Online Resources survey, 58.9 percent of households pointed to rising energy costs as a cause of trouble meeting their financial obligations.
“If people are not budgeting, they’re not prepared for these increases,” said Nina Heck, director of counseling at Consumer Credit Counseling Service of Maryland and Delaware Inc. “They’re just trying to deal with them, and they use the credit cards to cover the shortage.”