The Columbia Journalism Review reports on how the business press missed a sea change in the credit-card industry. Primary among what was missed is a body of work, compiled by nonprofit groups, academics, documentarians, and others, that marshaled data to make visible a dramatic qualitative and quantitative—and recent—shift in the relationship between the credit-card industry and its customers that does not benefit the consumer. That is that the credit-card exchange has shifted from a lending and underwriting paradigm to a sales paradigm involving penalties, fees, and default interest. Rates that were illegal a generation ago are no longer regrettable outcomes to be avoided but central to the business model. A business model that centers on a besieged American middle class caught in an iron vice of stagnating incomes; shrinking disposable income; rising costs for health care, housing, and education; usurious and rapacious practices of the credit-card industry; a growing, consolidating, and increasingly sophisticated debt-collection industry; and, to add insult to injury, a new bankruptcy law that closes the courthouse door to formerly eligible debtors. And, this view is supported by credible, anecdotal and aggregate data and happens also to be true.
The review does not argue that the business press completely ignored the trend, but those stories simply did not come close to reflecting the dramatic reordering of a marketplace. Also, the business press centered its attention on reporting on the financial performance, strategies, and intramural competition of corporate actors and of profiling their leaders instead of the consumer. Although this type of coverage is also necessary it made the business press in hindsight look out of touch.
Maybe it was a matter of emphasis, but the credit-card and general consumer-credit industry radical shift in a few year period left news organizations unprepared when the reckoning came.
With no adequate regulatory regime an increasingly sophisticated industry transformed the market from a convenience product to, in the phrase of Demos, a nonprofit New York-based research group, the American family’s “plastic safety net.” And the safety net proved a costly one:
• Americans’ credit-card debt now stands at $900 billion, up 9,000 percent from $10 billion in 1968, adjusted for inflation.
• It rose by a third in the five years ended in 2006, even during a housing and stock market boom, and as consumers shifted card debt to home-equity lines.
• Low and middle-income Americans average $8,650 in credit-card debt.
• The percentage of families that pay more than 10 percent of their income on credit-card payments rose to 23 percent in 2004, from 13.5 percent in 1989.
The repercussions of the plastic safety-net are evident in the bankruptcy data:
• Bankruptcies tripled between 1989 and 2004, to 1.8 million.
• For the first time in 2004, more people went bankrupt than were divorced or were diagnosed with cancer or graduated from college.
• For every household that files for bankruptcy, another ten would have benefited economically from doing so.
Concerning to the author of this article in the Review is that business publications routinely transmitted an utterly bogus and credit-industry-sanctioned myth—that recent increases in consumer debt were due mostly to discretionary spending, as though American consumers in recent years spontaneously and for no reason other than some unspecified general cultural decline suddenly became profligate and undisciplined borrowers, mindlessly piling up debt for flat-screen TVs and other frivolous consumer items.
The twin myths of over-consumption and the immoral debtor, to use Elizabeth Warren’s phrases, have been debunked for years. Warren documents that the average American household today actually spends less than in the 1970s on clothing, food, and major appliances, and that, after paying for education, housing, insurance, and health care, it has less disposable income, even though the household now has two wage earners.
Research shows, for instance, that nearly 30 percent of low and middle-income people with credit-card debt reported medical expenses to be a major contributor. And in a study cited by Warren, 87 percent of families with children filing for bankruptcy listed one of the “big three” reasons—divorce or separation, job loss, or medical expenses—as the cause.
The article in the Review is worthy for its examples. It is worth the read.