Credit Card Debt and the “New Economy”
Chances are you've seen those credit card companies hawking their wares (along with lots of free junk) on college campuses. It's also pretty likely that you or one of your friends has a serious problem with credit card debt. Seventy percent of students at four-year colleges with credit cards have over $2,000 of debt that they carry over from month to month. Fourteen percent of all American college students have credit card balances exceeding $7,000. The real kicker? Most students are paying upwards of 17% interest on this debt.
Credit card companies are so hungry for student cardholders that many are inking "affinity card" deals with campuses. The credit card companies pay a percentage of their precious profits to the (usually private) school, slap a picture of the university on the front, and in turn are granted exclusive right to market credit cards on campus.
The universities' position is understandable, if disgusting. They want money, and are willing to sell students to get it. The appeal of students to credit card companies, however, is less obvious. Students' income levels are notoriously low. Historically speaking, students were more likely to be avoided by creditors. Indeed, it's only in the last couple of years that students have begun to get credit cards with any regularity.
Despite their lack of income, students make surprisingly good credit card customers. They tend to carry over high balances and pay interest -- the primary way credit card companies make money. Unlike many people with high balances, however, they present fairly little risk to the company. Student -- particularly those from the upper end of the income spectrum -- tend not to default on their balances, instead turning to Mom and Dad to bail them out of credit card debt. Furthermore, unlike many folks who switch credit cards when they get a better offer, students are loyal. They keep their first credit card for an average of fifteen years.
Still, all this has been true for a while. Why is there this new sense of urgency on the part of the credit card industry to wrap its long tentacles around student? Simply put, despite record amounts of consumer debt, many credit card company's profits have begun to slip recently, thank in part to the introduction of low "teaser" rates in the early 90s.
Originally, low teaser rates made sense. Profits during the teaser period were forsaken for the promise of increased customers and profits later on. But now, since many credit card companies are going after the same customers, people can and do switch credit cards when a new company offers a low teaser rate, often before the rate rises on their old card. Profits for the credit card companies then begin to slip.
Because teaser rates worked, credit cards certainly aren't lacking for customers. 68% of Americans have a credit card and much of the "New Economy's" heralded low-inflation growth has been fueled by debt, much of it credit-card debt. Ever wonder how the economy has been able to grow prodigiously as income inequality has skyrocketed and wages have stagnated? There are two answers. The first is that with a booming economy, people feel optimistic about their finances even if they don't have much reason to be. The second, and more disturbing, answer is consumer spending based on debt, often credit card debt.
In August of 1999, the most recent numbers available, outstanding debt was a record 21.5% of after-tax income. Domestic debt, other than that of the government and financial institutions, rose by 8% over the past year after adjustment for inflation. This pace has only been matched by the debt-happy 1980s. household debt now equals 98% of household disposable income, a record percentage. In the first quarter of 1999, a large part of the 4.5% increase in gross domestic product was a 6.7% surge in consumer spending. That increase was the largest quarterly increase in 11 years, despite the fact that income did not rise an equivalent amount. Even more disturbing is the fact that serious credit-card delinquencies are at a record high, a sign that many people are overextended. According to the Federal Reserve, the proportion of families that missed a debt payment by two months or more rose to 8.1% in 1998, up from 7.1% in 1995.
The long-term effects of this "debtification" of the economy will be devastating when the economy inevitably slows down and unemployment rises. Until then, it's important to understand the glorious "New Economy" for what it is: an expansion built on the debt of students and of workers whose wages no longer meet their needs, benefiting a privileged few at the upper-end of the economic scale.
Article republished from The Activist, a publication of the Young Democratic Socialists