Credit problems have risen in the U.S. as the housing market declines. Diane McLeod is selling treasured belongings to pay off what she owes.
By GRETCHEN MORGENSON
Accumulating an oppressive amount of credit-card debt has become a global phenomenon. In the United States, carrying debt has become almost a way of life. But credit cards, which many see as the key to a higher standard of living, are increasingly turning on their owners, who may find themselves locked out not only of a better way of life, but even literally of their own homes.
Americans carry $2.56 trillion in consumer debt, up 22 percent since 2000 alone, according to the Federal Reserve Board. The average household’s credit card debt is $8,565, up almost 15 percent from 2000.
Household debt, including mortgages and credit cards, represents 19 percent of household assets, according to the Federal Reserve Board, compared with 13 percent in 1980.
By contrast, the nation’s savings rate, which exceeded 8 percent of disposable income in 1968, stood at 0.4 percent at the end of the first quarter of this year, according to the Bureau of Economic Analysis.
One sobering example of where this imbalance can lead is the case of Diane McLeod.
Right up until she crashed financially, Ms. McLeod was a dream customer for lenders. She juggled not one but two mortgages, both with interest rates that rose over time, and a car loan and high-cost credit card debt. Separated and living with her 20-year-old son, she worked two jobs so she could afford her small house in suburban Philadelphia, the Kia she drove to work, and the handbags and knickknacks she liked.
Then last year, back-to-back medical emergencies helped push her over the edge. She could no longer afford either her home payments or her credit card bills. Then she lost her job. Now she faces being evicted from her home and her credit profile is in ruins.
Years of spending more than they earn have left a record number of Americans like Ms. McLeod standing at the financial precipice. They have amassed a mountain of debt that grows ever bigger because of high interest rates and fees.
While the circumstances surrounding these downfalls vary, one element is identical: the lending practices of America’s merchants of debt have led millions of Americans - young and old, native and immigrant, affluent and poor - to the brink.
The rates that credit card issuers routinely charge even borrowers with good credit records have risen, to 19.1 percent last year from 17.7 percent in 2005 - a difference that adds billions of dollars in interest charges annually to credit card bills.
Average late fees rose to $35 in 2007 from less than $13 in 1994, and fees charged when customers exceed their credit limits more than doubled to $26 a month from $11, according to CardWeb, an online publisher of information on payment and credit cards.
“Today the focus for lenders is not so much on consumer loans being repaid, but on the loan as a perpetual earning asset,” said Julie L. Williams, chief counsel of the Comptroller of the Currency, in a March 2005 speech .
In 2007, when Ms. McLeod earned $48,000 (an amount significantly lessened after she paid United States and Pennsylvania taxes), she was charged more than $20,000 in interest on her various loans.
In the mid-’90s, Ms. McLeod got several credit cards. When her marriage began to founder, she said, she shopped to make herself feel better.
Earning a livable wage at Verizon Yellow Pages, Ms. McLeod finally decided to leave her marriage and buy a home of her own in February 2003. The cost was $135,000, and her mortgage required no down payment because her credit history was good.
“I was very proud of myself when I bought the house,” Ms. McLeod explained. “I thought I would live here till I died.
Adding to her burden, however, was about $25,000 in credit card debt she had brought from her marriage. Because her husband did not have a regular salary, all the cards were in her name.
After she had been in the house for a year, a friend who was a mortgage broker suggested she consolidate her debts into a new home loan. The property had appreciated by about $30,000, and once again she put no money down for the loan. “It was amazing how easy it was,” she recalled. “But that’s a trap, and I didn’t know it then.
Naturally, the refinance had costs. There was an $8,000 penalty to pay off the previous mortgage early as well as roughly $1,500 in closing costs on the new loan.
To cover these fees, Ms. McLeod dipped into her retirement account. Only later did she realize that she had to pay an early-withdrawal penalty of $3,000 to the Internal Revenue Service. Short on cash, she put it on a credit card.
Soon she had racked up another $19,000 in credit card debt. But because her home had appreciated, she once again refinanced her mortgage.
Almost immediately after she refinanced, in late 2005, the department store where she worked a second job, as a jewelry saleswoman , cut back her hours. She quit altogether, and her son moved out of the house, where he had been helping with the rent, to live with a girlfriend. Ms. McLeod was paying $1,500 a month on her mortgage.
As happens with many debt-laden Americans, an unexpected illness helped push Ms. McLeod over the edge. In January 2006, her doctor told her she needed a hysterectomy. She had health care coverage, but she could no longer work at a second job.
She made matters worse during her recovery, while watching home shopping channels. “Eight weeks in bed by yourself is very dangerous when you have a TV and credit card,” Ms. McLeod said. “QVC was my friend.
Later that year, Ms. McLeod realized she was in trouble . She started to sell knickknacks, handbags, clothing and other items on eBay to help cover her heating and food bills. She stopped paying her credit cards so that she could afford her mortgage.
A year ago she was back in the hospital, this time with a burst appendix. She spent 19 days in the hospital and six weeks recuperating. Her prescriptiondrug costs added to her expenses, and by September she could no longer pay her mortgage.
On February 14, Ms. McLeod was suspended and soon afterward fired from her primary job at Verizon.
Ms. McLeod said she owed $237,000 on her home mortgage. Of that, sheriff’s costs are $4,350, and “other” fees related to the foreclosure come to $3,000. A house of similar size down the street from Ms. McLeod sold for $153,000 in January.
Her credit card debt totals around $34,000, she said. Each month the late fees and over-limit penalties add to her debt. Ms. McLeod said she would probably file for bankruptcy.
A sheriff’s auction of her home on June 12 received no bidders, Ms. McLeod said. The bank will soon evict her.
Ms. McLeod says she hopes to be living in an apartment she can afford soon and to get back to paying her bills on time.
She does not want another credit card, she said. But even though her credit profile is ruined, she still receives come-ons.
Recently an envelope arrived offering a “pre-qualified” Salute Visa Gold card issued by Urban Bank Trust. “We think you deserve more credit!” it said in bold type.
The Salute Visa offered Ms. McLeod a $300 credit line. But a closer look at the fine print showed that $150 of that would go, as annual fees, to Urban Bank.
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