US consumer debt points to need for credit card wisdom

There may no longer be a ``company store'' to make us ``another day older and deeper in debt,'' but we've certainly found plenty of other ways to borrow money. According to the Federal Reserve Board, Americans owe more than $664 billion to banks, department stores, credit card companies, finance companies, savings-and-loans, and any other institution that will be only too happy to extend credit or loans. That $664 billion owed by individuals, by the way, equals about one-third of the United States government's $2 trillion debt.

One reason the individual debt figure is so high, credit specialists believe, is that many Americans are losing the handle on debt. Consider:

While people will scramble mightily for an extra percentage point on their savings, many of them will quickly sign up for a Visa or MasterCard without checking the interest rate, annual fees, or grace periods before which interest is added to the account.

When people need to borrow money, they'll often use another debt instrument -- the credit card -- because it seems more convenient and they expect to be able to pay off the credit card balance quickly.

Nearly a third of all Americans believe all credit cards are alike, even though interest rates on credit cards vary from 13 or 14 percent up to 22 percent.

Homeowners who have lived in their houses several years and seen their equity grow faster than their weeds are quickly learning to tap that equity for more debt.

``Many consumers are beginning to treat credit cards as if they were an additional source of income, rather than a revolving loan,'' observes Elgie Holstein, associate director of the Bankcard Holders of America, a nonprofit group.

``This is part of an ongoing and accelerating trend,'' he continues, ``in which credit cards, home equity lines of credit, automatic teller machines, Sears' Discover card that gives access to money market funds, are all changing the way we view credit. . . . We can't turn the clock back. We just have to learn to exercise more caution.''

``We've been trying to find out why consumers aren't putting marketplace pressure on credit card issuers to lower their rates,'' says Camille Haney, president of a public-affairs consulting and research firm in Milwaukee. Her firm and the University of Wisconsin's Center for Consumer Affairs recently cosponsored a survey of US private- and public-sector consumer leaders.

According to those questioned, nearly one-third of the public doesn't bother to compare credit card rates, and about 30 percent think all credit cards are alike.

Of the consumer leaders themselves, 82 percent don't think the public has enough information to make careful choices about revolving credit cards, and 86 percent thought credit card companies failed to give people the required information about terms and interest rates so they could understand them.

An example of what can happen when people aren't fully informed about the terms of their credit or charge cards came to our attention recently. Several months ago, a friend charged several appliances at Sears, Roebuck. The final bill came to about $2,000. After a few months, the entire bill was paid off, except for about $15. During that period, the minimum monthly payment on the bill was about $110.

Shortly after getting the bill down to $15, he charged some school clothes for his children and a few other small items, bringing the bill to more than $300. Now, instead of lower monthly payments, Sears still wanted $110 a month.

Although he is able to meet these payments, he wondered why the $110 figure was still being used. The reason, he was told, was that because his balance had not reached zero, his minimum payments stayed at the higher level. He was also told that all this information was in the contract he signed when he got the card several years ago. After he complained about the $110 payment for the $300 balance, a Sears supervisor lowered the minimum monthly payment to about $25.

This may be an isolated case, but it does illustrate that before people take on any kind of credit, they should do everything they can to find out what they're getting into. They should also be sure they're getting the best credit or the best type of loan for a particular need.

One way to save on the cost of credit is to look for alternatives to the credit card. An increasingly popular alternative is the home-equity loan and its cousin, the home-equity line of credit. Handled carefully, with full knowledge that you're putting a piece of your house on the line, home-equity credit can be convenient and inexpensive. Merrill Lynch, for example, ofers an Equity Access credit account for two percentage points above the prime rate, now at 8 percent. You can tap the account by writing a check or, in most states, using a Visa card.

Borrowing against home equity may become increasingly popular if one part of the Senate Finance Committee's tax reform proposal becomes law. It would remove the deductibility of all interest except that on home loans. If this change is interpreted to include home-equity loans, banks and other financial service companies can be expected to push these loans heavily.

As this and other forms of credit grow in popularity, it will be even more important to read contracts, compare terms and interest rates, and know your debt limits. Borrowing options are growing, but so are the pitfalls.