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May 02, 1999, Sunday, Final Edition

SECTION: FINANCIAL; Pg. H02; CASH FLOW

LENGTH: 1326 words

HEADLINE: Disinterested Advice on Debt; Work to Earn the Disdain of the Credit Card Companies

BYLINE: Albert B. Crenshaw

BODY:

As Congress debates measures to overhaul the nation's bankruptcy laws, evidence is emerging that consumers may at last be bringing their finances under control on their own.

The rate of personal bankruptcy filings, which has soared in recent years, is showing signs of leveling off, and a new survey by the Consumer Federation of America finds that the number of people "very concerned" about their ability to meet their monthly credit card payments has declined.

Similarly, more Americans are becoming optimistic about their financial futures, and fewer are aiming to make an extravagant purchase, such as a fancy car or boat, in the next five years, according to another survey sponsored by Phoenix Home Life Mutual Insurance Co.

The developments suggest that the continued strong performance of the economy, along with the impact of the incessant preaching of financial planners, consumer groups and newspaper columnists, is starting to ease the financial troubles of many families.

CFA, for example, found that the number of people very concerned about being able to pay their monthly credit card bills has declined to 31 percent, from 37 percent two years ago. Bankruptcy filings actually declined in January and February, and there was a relatively modest 1.5 percent rise in 1998, according to CFA.

But while those figures are an improvement, the entire picture is hardly rosy. The nation's savings rate continues to be negative, meaning that Americans are not only not saving, they are spending down their nest eggs, presumably to maintain or enhance their standards of living.

Consumer debt continues to rise, with revolving credit-card-type accounts now topping half a trillion dollars (though that figure includes "convenience" use of credit cards, which isn't what is typically thought of as debt because it gets paid off at the end of the month), and the Phoenix survey finds an undercurrent of worry about retirement income.

Today many families make almost all their principal purchases on credit. Houses and cars and, to a certain extent, appliances have long been bought on credit, but now credit card holders are charging and paying interest on items of little or no lasting economic value, such as clothes, restaurant meals and vacations.

Some items aren't even purchased at all. Many people, for example, lease their cars, meaning they have debt-like payments but aren't buying anything. At the end of the lease, they still must either buy the vehicle or start over with another lease--and more payments.

Debt is not itself a bad thing. Used properly, credit allows young families to buy their own homes and acquire other trappings of middle-class life without waiting until middle age. Homeownership, in turn, gives these families a stake in their communities and encourages them to take an active role in keeping it a good place to live.

But easy credit--and plainly credit is very easy today--creates a temptation to push the envelope, to live at a higher level than the borrower can safely afford.

When things are going well, as they are now for the vast majority of Americans, consumers can handle this type of debt without problems. But not only do those endless payments drain away the ability to save, they also eliminate any margin for error in a downturn.

Without realizing what is happening to them, many people end up without savings, with debt service that consumes 30 percent, 50 percent or more of their income, said CFA Executive Director Stephen Brobeck.

Then, if there is a job loss, illness or other disaster, it "pushes them right over the cliff," Brobeck said. ". . . There's no cushion there."

The result has been bankruptcy for millions of Americans in recent years and a fierce debate over whose fault that is. Consumer groups point to the aggressive marketing of credit cards, while lenders say current law makes it too easy for consumers to shed their debts even though they could pay a substantial portion of what they owe.

Lenders strongly support a House bill that would tighten the rules significantly, while consumer groups say the bill would punish debtors who don't deserve it.

Bankruptcy reform has been repeatedly derailed recently, and it's not clear this year will be any different. But whatever the outcome, the best course for consumers is to continue try to reduce debt and channel the savings into investments that will grow over time.

Remember, borrowing to purchase a consumable or depreciating item is doubly expensive--you pay the interest while the item itself disappears or loses value.

Financial planners recommend a series of steps for getting control of debt:

Compile a list of what you owe, what the interest rate is (and if it is tax-deductible) and what the payments are. Include anything else you owe, such as your mortgage, car, credit cards and student loans.

Stop the growth. This applies mainly to credit cards. Check your monthly balance. If it is growing, you're sinking, and you need to cut your spending. If you're paying only the minimum, it may take decades to pay off even a stable balance, and if you are paying penalty rates, which can run to 2.5 percent a month, you not only won't ever pay it off, the debt will get larger over time.

You may complain that this is easier said than done, but unless you've lost your job or have already run up a huge balance, you can do it. It'll likely mean no new clothes for a while and (gasp) cooking some of your own meals, but there are worse fates. After all, you can eat steak in for the price of pizza out.

Line up the debts by interest rate. Put the highest at the top, which will probably be your credit cards, and concentrate on paying these down first. With credit cards, pay more than the minimum, as much more as you can. Your target balance is zero. After that you can become what the banks hate--the convenience user. You pick the card with the best premiums and pay it off every month. You become the farmer instead of the cow.

Keep paying. Some debt, such as car loans and student loans, is fixed-term, meaning at some point it will be paid off. When that day comes, keep making the payments, but to yourself. Set up a separate account if you need to, and make those payments into it. Some employers will allow payroll savings plans that automatically send a chunk of your pay to savings before you even see it. Or you can set up an automatic debit from your bank account into savings or a mutual fund.

This is the turning point. When you are finally able to meet your obligations and start paying yourself, you are on your way. And it's a spiral. Keep the car three years after the end of the payments, and maybe you can buy the next one for cash--or at least a much smaller loan. By continuing to pay yourself first, you start to see your nest egg grow, and as it grows it starts to generate its own earnings.

Keep it up long enough and it's like having another wage earner in the house.

Encouraging Signs on Credit

While bank card solicitations have risen steeply in recent years, unused lines of credit also have increased . . .

Percent change, 1992-98

Unused credit lines 315%

Credit card mailings 289%

Credit card debt 175%

. . . and credit card debt -- while still increasing -- has been growing at a slower rate.

Credit card debt, in billions Annual increase

1991 $ 242.3 11.9%

1992 $ 266.4 10.0%

1993 $ 283.5 6.4%

1994 $ 315.4 11.3%

1995 $ 378.2 19.9%

1996 $ 453.8 20.0%

1997 $ 508.9 12.1%

1998 $ 535.3 5.2%

1999 $ 569.0 6.3%

SOURCES: Federal Reserve Statistical Release, Consumer Federation of America, BAI Global, Veribanc

GRAPHIC: Illustration, The Washington Post

LOAD-DATE: May 04, 1999