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Low-Income Debt

An economist with DRI/McGraw-Hill said yesterday there is a disproportionate acceleration of credit card debt among lower-income Americans. Dr. David Wyss says a full 27% of families with household income below $10,000 now have credit card obligations that exceed 40% of their income. By comparison, fewer than 5% of families earning more than $50,000 are equally burdened by credit card debt. Wyss says the most distressing fact is that those households with the least disposable income are most overextended and increasing their credit card usage faster than any other demographic group. He called for card issuers to back off and reevaluate loan loss reserves.

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A disproportionate acceleration of credit card debt among lower-income Americans, those with household incomes below $25,000, may be directly related to the record high level of more than 1 million personal bankruptcy filings last year, and if left unchecked, could become a major concern for the nation’s banks and other credit card issuers, according to David A. Wyss, Ph.D., research director and financial economist for DRI/McGraw-Hill, a leading provider of economic consulting and information services. A full 27 percent of families whose household income is below $10,000 now have credit card obligations that exceed 40 percent of their income. By comparison, fewer than 5 percent of families earning more than $50,000 are equally burdened by credit card debt.

“By extending too much credit to Americans who will have the most difficulty paying it back, banks are forgetting the basic principles of banking,” said Wyss, one of the nation’s most respected financial economists, who delivered his remarks here today at the National Collections and Credit Risk Conference, hosted by Faulkner & Gray Inc.

Wyss acknowledged that consumer debt overall has stabilized in the past year; credit card usage, however, is rising steadily. Outstanding consumer credit card debt as a percentage of disposable income among all Americans has risen to 8 percent, a 60 percent increase since 1989. More distressing is that those households with the least disposable income are most overextended and increasing their credit card usage faster than any other demographic group.

“The risk should be apparent and glaring to the collections and credit industry, not to mention many American consumers for whom the relaxed lending standards are actually a disservice,” said Wyss. The default rate on consumer debt jumped by over 40 percent last year alone. If this trend continues, banks will be forced to reevaluate loan loss reserves and ultimately it could have a profound economic impact.”

According to Wyss, the trend over the past four years has been a greater willingness on the part of domestic banks to make consumer installment loans. Aggressive marketing campaigns and lower standards pushed revolving credit levels to over $450 billion last year.

“Banks are only now beginning to back off,” said Wyss. “More than 50 percent of the largest U.S. banks report that they are tightening standards for credit card loans, and about 25 percent of smaller banks are doing likewise.”

DRI/McGraw-Hill, a unit of Standard & Poor’s, is the world’s leading provider of economic consulting and information services. DRI/McGraw-Hill provides data, analysis, forecasts and expert advice to more than 2,000 business, financial and government organizations worldwide. Headquartered in Lexington, Mass., DRI/McGraw-Hill maintains offices in New York, San Francisco and Washington, D.C., and outside the United States in Canada, Belgium, France, Germany, Italy, United Kingdom and Hong Kong. The company also maintains strategic partnerships with firms throughout Asia and Latin America.

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