Des Moines Register
11-25-07
Iowans' credit troubles increase
By PAULA LAVIGNE • REGISTER STAFF WRITER
No more 2-foot, table-top Christmas trees for Tony Collins. The 46-year-old
paramedic will buy a big tree - the kind you can put presents under - this year
because it's time to splurge just a little.
Collins wrote his last $665 check to a credit counseling center on Nov. 13, ending
four years of paying off what began as a $25,000 debt.
Collins' struggle may be over, but this holiday season marks a perilous time for
the growing number of Iowans using credit cards to try to manage deeper debt.
Local economists and credit experts say they're concerned about a recent rise in
credit troubles in Iowa.
Here's why:
- Iowans' average consumer debt, which includes things like credit cards and car
loans but not mortgages, rose 4.1 percent from $12,466 to $12,981 from June to
September, according to the Experian National Score Index. Over the same
period, the national average rose 2.2 percent to $16,223.
- The average debt of people who seek help from Consumer Credit of Des
Moines, a nonprofit counseling service, rose 54 percent - to about $17,473 - from
2002 to this year.
- The number of bankruptcies, which fell nationwide after the rules changed in
2005, is rising - to more than 600 new filings statewide per month.
- Counselors and others who work with debtors say they saw an unusual jump in
clients this fall, a typically slower season. That makes them assume they will be
packed in the months after Christmas.
"Today was a wild day for booking appointments," Tom Coates, CEO of
Consumer Credit of Des Moines, said Tuesday. "People are finally hitting that
wall." Next year could be a record year for new clients, he said.
Experts say a number of unfavorable economic factors plaguing consumers
nationwide are colliding now for many Iowans. Adjustable-rate mortgages are
making it hard to keep up with payments. Prices are increasing for necessities
like health care and fuel. Credit card interest is rising for many of those already in
trouble.
Meanwhile, people fail to save for emergencies, and do little or no budgeting.
Credit experts say it boils down to this: Even in Iowa, where average debt levels
historically are lower than in other parts of the country, many people are simply
spending more than they can afford.
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"Within 2 1/2 years I found myself robbing Peter to pay Paul," said Collins, of
Dallas Center, who fell into the habit of using credit cards to keep up with daily
expenses. His plan to keep small balances on several cards with low introductory
rates backfired when he couldn't keep up on the payments, he said.
"I didn't want to lose my home, and I wanted to protect my credit and get out of
debt."
Budgeting ignorance, economic woes
Today's rising costs and higher unemployment are similar to those found in the
1970s, another period in which consumers found they could no longer afford
things they once enjoyed, Coates said.
This most recent spike in people seeking credit counseling and bankruptcy is
likely due to lenders cutting off their easy cash flow, Coates said.
Loose lending practices, especially those used by home lenders to stretch people
into high-risk loans, tightened this year. Falling real estate prices - made worse
by a glut of foreclosed homes on the market - also have made it even harder to
tap into home equity loans, which many borrowers used to help pay off credit
card debts, he said.
The Midwest has not been hit as hard as the coasts, but many Iowans who
bought homes they couldn't afford are facing foreclosure, bankruptcy or both.
Donald Neiman, a private bankruptcy trustee in Des Moines, believes credit card
debt is the main reason people end up in his office. Getting hit with adjustablerate home loans and impending foreclosure is a close second.
Neiman said he sees a lot of small-business owners who start companies by
essentially borrowing money with credit cards when banks refused to give them a
loan. Mounting medical bills and gambling debts round out the rest, he said.
Perhaps the most common theme, experts say, is a lack of education. People
simply never learned how to manage their money.
Falling into debt isn't about buying expensive things, said Iowa State University
professor Tahira Hira.
"It's spending more than what you really have, but you don't know you're doing it
because you never sat down and took at good picture of your money coming in,
and what has already gone out."
Credit card interest consumes debtors
Collins, the recovered debtor, drives a Dodge pickup that has logged more than
200,000 miles. He says he didn't dive into debt trying to mirror the lifestyles of the
rich and famous.
He admits he probably took on more than he could handle when he bought a
modest house in Dallas Center seven years ago for $100,000, which is less
expensive than most houses in the Des Moines area.
"It's no Taj Mahal," Collins said, but the payments were double what he had been
paying in rent, and he had other expenses, including child support, that ate up a
lot of his paycheck. The house and big yard prompted him to spend even more,
including $3,000 at Sears for a new lawn mower.
Although he was making $50,000 at the time, the other expenses made it difficult
to cover his day-to-day bills. He used credit cards for emergencies, such as
paying $1,000 to keep his pickup running. Even little things, such as admission
fees and concessions at his sons' sporting events, added up.
"I tried using different cards to keep the balance low, but it multiplies and
compounds," he said. "When you get to every payday, you just have to decide
who gets paid first."
Compounding credit card debt also burned Caroline Dale, a 39-year-old Des
Moines woman who struggled about eight years ago. She started accumulating
credit cards - Visa, MasterCard, Discover, Von Maur, Sears - while attending
Iowa State University.
Dale was the type of customer credit card companies love. She never missed a
payment, but she paid only the minimum balance as her overall debt ballooned to
$19,000. She was making between $35,000 and $45,000 a year and was ready
to buy a house, but she knew she had to clear her debt first.
"When you looked at my debt-to-income ratio, it was too high," she said. "If I
could get (a loan) it would have been at a huge interest rate."
Collins and Dale solved their problems through credit counseling. They were
asked to close all their accounts and live within a strict budget; if they didn't have
cash, they couldn't buy things.
Others end up in bankruptcy, even though recent law changes require more
scrutiny of which debts the court will forgive and which must be paid back.
Brown-bag lunches begin new budgets
Debtors who seek credit counseling get a crash course in personal finance.
Some changes - such as getting rid of an expensive house or car - are hard to
make, Coates said. Cutting back on vacations, Christmas spending and dining
out is easier.
"It's a very humbling experience to take the first step to walk in here and lay all
your dirty laundry on the table," said Collins, who spent four years in credit
counseling.
Collins gave up summer trips to Montana on his motorcycle, and he had to tell
his teenage sons, whose friends' parents were buying them new cars, that
money was tight. But he said it wasn't too hard to change his overall spending.
"All I had to do was budget," he said. "It was just reprioritizing how I managed my
money and getting back on track."
Dale said she paid off her $19,000 in debt simply by budgeting and accepting
that she could only buy items for which she had enough cash.
"They never said you really shouldn't go to Starbucks as many times a week,"
she said. In December 2005, Dale paid off her debt and achieved her dream of
buying a house - a two-bedroom place near 57th Street and University Avenue in
Des Moines.
This season will also be more enjoyable for Collins, who plans to celebrate with
his sons, ages 16 and 18. A full-sized Christmas tree will replace the "Charlie
Brown" tree his co-workers gave him 10 years ago.
But it will not have thousands of dollars' worth of gifts under its boughs.