Consumers’ Debt Is Getting Deeper

In a surprising report that shows consumers’ debt problems are even deeper than many thought, the number of borrowers falling behind on credit card payments surged to a record high in the fourth quarter, the American Bankers Assn. said Thursday.

Nationwide, credit card accounts that were 30 days or more past due reached 3.72% in the period. That was up from 3.48% in the third quarter of last year and the highest since the ABA began tracking the rate in 1973.

California banks reported an even higher record level as delinquencies rose to 4.15% in the fourth quarter from 3.84%, according to the ABA’s survey.

Some economists said the California figures appear to be overstated. But there was no doubt that credit card delinquencies were rising throughout the country, and this surprised economists, who had expected to see a drop in overdue accounts because many banks have tightened their credit standards in recent years and the economy has been improving.

The ABA’s survey said past-due auto and home equity loans in California and the nation also rose in the fourth quarter, though not to record levels.

“It is worrisome,” said Mark Zandi, economist at Regional Financial Associates, an economic consulting firm in West Chester, Pa. “It indicates that there is a group in our economy that is under severe distress, and it’s happening at a time when our economy is strong.”

That group, comprising mostly lower-income households, is now paying for the liberal credit that was extended to them by lenders. The fact that banks curtailed credit recently, Zandi said, may have actually pushed many of those borrowers over the edge because they could not keep themselves afloat by taking on even more debt.

By contrast, federal data suggest that mid- to upper-income households are generally better managing their debt loads, benefiting from rising incomes and stock prices.

The banks themselves don’t appear to be threatened by the increase in troubled consumer loans.

“Bank capital levels and reserves for losses are historically very high,” said James Chessen, ABA chief economist. “Banks are well-positioned to handle any losses generated by the delinquencies.”

MasterCard International downplayed the significance of the survey. Citing a study of its own released this week, it said the increase in delinquencies partly reflect the changing role of credit cards as more consumers use plastic to buy groceries and gasoline and to accumulate frequent-flier mileage.

However, federal studies have found such “transaction” use of cards, in which much of the balance is paid off regularly, still represents only $1 out of every $7 of credit card purchases.

Moreover, the latest Federal Reserve Board data indicate that debt-service burdens for all U.S. households have been steadily increasing since late 1993, with low-income households feeling the most pressure. Because the economy and the job market remain strong, the rise in debt loads does not pose immediate risks, analysts say, but a downturn in the economy would create significant hardships for many.

In California, bank industry executives were mystified that credit card delinquencies surpassed the national average, given that California institutions have been more tightfisted in extending credit during the recession.