Ruth Learst expects to be free from credit card debt this time nextyear -- all $100,000 of it.
After four years of a rigorous debt management program, Ms.Learst reiterates one lesson: "Right now, if I use a credit card, Iwould pay off all the balances at the end of the month."
At one point, Ms. Learst, a local government administrator inher mid-50s, and her husband, an aircraft mechanic, had 17 credit cards-- many with interest rates of 15 percent or higher. They were usingthem to pay for everyday living, such as clothes, gas and dining out.The balances built up, and soon the Learsts were using all their cashto make payments to the credit card companies. It's only now -- as theyinch toward freedom from debt -- that she and her husband can eventhink of saving for retirement.
Experts worry about baby boomers such as the Learsts who arecaught in a credit card debt cycle at a time when they should besocking away money for retirement. They fear that for every householdthat's getting out of debt, more are getting into it.
The number of consumers who pay off their credit card balancesin full each month has dropped for three consecutive years -- from 44.4percent in 2000 to 38.3 percent in 2003, according to newly releaseddata from cardweb.com.
Experts attribute the trend in general to the country's creditculture, and in particular to the baby boomers, the huge generation ofAmericans who set the pace on nearly every cultural phenomenon. "Boomers are just holding onto a younger person's behavioreven in their 50s," said David Robertson, publisher of the NilsonReport, a consumer payments newsletter. "They are using revolvingcredit as a financial tool." On average, Americans pay back about 14 percent to 16 percentof their credit card balances each month, according to cardweb.com.Many don't even think twice about making just the minimum payments. "Boomers are comfortable -- almost too comfortable -- withdebt," said John McManus, editor in chief of American Demographicsmagazine. "Another factor is the expectation that they'll continue towork beyond the normal retirement age. So there isn't really apsychological inhibitor to carrying debt." Experts say anyone taking this approach to revolving credit iscourting disaster. Interest costs can grow out of control. Many consumers end upmaking just the minimum payments and stay in debt far longer than theyshould. Consumer advocates caution against this lifestyle --particularly for those nearing retirement.
"Sometimes debt can be OK -- it can be a house that providesshelter and may build an asset for you and your family, or an educationthat will pay off in the form of a higher salary," says Rob Schneider,a senior attorney with Consumers Union. "But if you're financing alifestyle you can't afford on credit cards, you're in danger of hockingyour future." Carolyn Matthews, a 48-year-old hairdresser in Arlington,couldn't agree more. She racked up nearly $6,000 on 11 credit cards. A single mother, she had started with just $1,000 on hercredit cards in 1999. Then she took on an additional car payment, andevery time she ran into a cash crunch -- be it braces for a kid or ahospital bill or a car repair -- she used her credit card. She got behind on payments. The late fees added up, and thebalance continued to grow. Making the minimum payments didn't get heranywhere. Now she's in a debt management program and estimates that itwill take her two years to pay everything off. She can't even think of saving for retirement until that time.Experts say the first big mistake consumers make is to livebeyond their means and build up a balance on their credit cards. The second mistake is to make just the minimum payments.That's a sure way to feed the debt beast.
If you make only minimum payments, a $2,500 balance will take30 years and three months to pay off, at a total cost of $7,733.49.That's assuming an annual percentage rate of 17 percent and a minimumpayment of 2 percent or $10, whichever is greater. Using the same assumptions, a $5,000 balance will take 40years and two months to pay off, at a total cost of $16,305.34. The problem is that many consumers don't realize how littleprogress they're making by paying the minimum. In California, a new lawrequires credit card companies to include these calculations on everybilling statement. But that's the exception rather than the rule. Be Careful With the PlasticConsumer advocates offer the following tips for avoidingburdensome credit card debt: Set yourself up in a lifestyle you can afford, so youspend less than you earn and can build up a cushion of savings to usein an emergency. Before buying a product or a service with a credit card,ask yourself whether you can pay it off in full at the end of thatmonth, or at least in the near future. If you have a card with a high interest rate, don't use itfor big purchases. Try as much as possible to pay off balances in full. If you're getting too far into debt, seek help early froma reputable consumer counseling agency. Source: Dallas Morning News research 2004, TheDallas Morning News. Distributed by Knight Ridder/Tribune Business News.
