So why do we worry so much? For starters, the very success of consumer credit makes us uncomfortable. As borrowers, we may feel guilty about running up debt, anxious about making payments, and resentful of the constraints that old obligations (and old credit records) impose on our current choices. We may find it too easy to buy things we may later regret. In theory at least, we might prefer the days when paternalistic—or snobby—salesclerks checked our spending. “Our store manager’s duty is to protect the buyer from unwise expenditures,” wrote the retailer Julian Goldman in 1930.
If a woman patron selects a gown or a wrap which is beyond her means, the store manager advises against the purchase. He knows, because the customer—conforming to the rule from which there is no deviation—has confidentially explained her circumstances in full detail … The friendly, intimate, patient, personal interview is the key to our sales operation.
On second thought, why should your economic choices be the store manager’s business? Practicality aside, anonymous databases and credit scores are a lot less intrusive.
When credit is cheaper to use and easier to arrange, people do use more of it. Hence those big, scary numbers, which grow along with the economy and the population. Contrary to a common perception, however, the people driving up the totals aren’t primarily the financially strapped. They’re “high-wealth consumers in their prime earning years,” observes Andrew Kish, an economist at the Philadelphia Federal Reserve. Almost half the growth in debt between 1989 and 2004 (the most recent year for which data are available) came from the highest-income 20 percent of American households. (By contrast, the bottom 20 percent held about 3 percent of consumer debt—an increase from 1.9 percent—and accounted for a bare 4.5 percent of the growth.) If the rich are getting richer, it makes sense that they’re also running up more debt. They can reasonably expect to pay it.
These affluent families also account for half of the outstanding consumer debt. So the $10,000 average that Obama cited isn’t in fact owed by the “typical” family with an average income. That figure is calculated by spreading the much larger debts of the rich over the population as a whole. All by herself, Cindy McCain owed at least $200,000 on two American Express cards, according to her husband’s campaign disclosure documents. That sounds terrifying until you realize that this wealthy woman pays her monthly AmEx bills in full.
Like those of Mrs. McCain, some of the credit-card balances included in government statistics aren’t really debt at all. They’re temporary charges for convenience’s sake. Nowadays, credit cards are easier to use than cash—no fumbling for change while other shoppers wait impatiently behind you. Plus, companies offer rewards points and frequent-flier miles, and they give you a free float period if you pay your balance in full. So people who don’t need to borrow money use their credit cards as a convenience, running up charges over the course of a month and paying everything off when the bill comes due. Whatever they owe on the day that debt statistics are collected goes into the total figures on consumer credit. This “convenience use” grew from about 6 percent of total credit-card debt in 1992 to 11 percent in 2001, calculates Kathleen Johnson, a Fed economist. That growth was two and a half times the growth rate for credit-card borrowing overall.
Of course, rich people and families who pay their bills every month aren’t the only Americans with debts, and they certainly aren’t the ones whose sad stories make the news. But financial innovations have also made lower-cost credit more available to lower-income people. Even those much-criticized payday loans cost less than pawnshop loans or bounced-check fees. Credit cards are cheaper still.
And credit-card companies have changed their lending policies in ways that make credit more accessible—but also more complicated. Credit-card prices used to be “high and simple,” notes another study by the Philadelphia Fed. Everybody paid the same rate, regardless of credit risk. If you carried a balance but reliably paid your bills, you were subsidizing borrowers who weren’t so dependable. But because the interest rate wasn’t high enough to cover the riskiest potential customers, generally those with lower incomes or frequent unemployment, they were cut out of the credit-card market altogether.
Now, instead of charging everyone the same, companies adjust the interest rates according to customers’ credit scores. They also charge special fees for late payments, purchases that exceed a credit limit, foreign-currency transactions, phone payments, and so forth. This structure makes it profitable to extend credit to high-risk borrowers, including those with low incomes. It’s more inclusive, and arguably fairer, since it eliminates cross-subsidies. But it’s also hard to explain. Hence Obama’s complaints that credit-card contracts “have gone from being one page long a few decades ago to more than 30 pages long today.”
Of course, in the good old days of one-page contracts, politicians still decried easy credit and demanded more consumer information. Ever wonder why your credit-card agreement’s easy-to-read “Schumer Box” specifies a minimum finance charge of, say, 50 cents? You’ve probably never thought twice about that charge, but back in the late 1980s, then-Congressman Charles Schumer and his colleagues thought that telling consumers the minimum charge was very important.
And back in those good old days, of course, some people still couldn’t make their credit-card payments. Others worried that they’d never get out of debt. Still others felt guilty about buying luxuries even when they could afford them. Forms of credit may change, but credit anxiety, alas, does not.