Con­sumer debt is at a record high. Haven’t we learned?

The Washington Post Sunday - - BUSINESS - Michelle Sin­gle­tary

The Dow Jones in­dus­trial av­er­age hit 22,000 in Au­gust, ush­er­ing in yet an­other noteworthy high. But Amer­i­cans also reached the big time with a dif­fer­ent fi­nan­cial mile­stone this year — and not in a good way.

Out­stand­ing con­sumer re­volv­ing debt — mostly credit card debt — hit an all-time peak of $1.021 tril­lion in June, ac­cord­ing to the Fed­eral Re­serve.

This should be a scary statis­tic. The last time the debt level was nearly this high was in 2008, when the U.S. econ­omy was mired in a re­ces­sion.

“We sim­ply can’t keep tak­ing on credit card debt for­ever with­out it caus­ing ma­jor prob­lems,” said Matt Schulz, a se­nior in­dus­try an­a­lyst for Cred­itCards.com. “This record prob­a­bly won’t be a ma­jor tip­ping point, but it likely isn’t too far off.”

Schulz says this mile­stone should be a wake-up call about the level of credit card debt Amer­i­cans are ac­cu­mu­lat­ing. It’s a re­minder to re­mem­ber the past.

Here’s what we learned dur­ing the Great Re­ces­sion. Peo­ple had

what they thought was a rea­son­able amount of obli­ga­tions. They were mak­ing their auto and mort­gage pay­ments. They used credit to buy stuff to fill up those homes, eat out more or take va­ca­tions. It all seemed man­age­able — un­til life hap­pened: The hous­ing mar­ket im­ploded, and unem­ploy­ment spiked. The il­lu­sion that peo­ple could get what­ever they wanted — on credit — was shat­tered.

The truth was that the debt wasn’t as man­age­able as peo­ple thought, be­cause they didn’t have an ad­e­quate cash cush­ion to help them through a dis­rup­tion in their in­come.

As the amount of re­volv­ing credit is now soar­ing to new heights, it takes me back in time. (By the way, de­faults are ris­ing, too.) I fear that as the econ­omy has im­proved, our col­lec­tive mem­ory of bad times has faded. Amer­i­cans are again think­ing they can get what­ever they want with bor­rowed money.

Have we not learned our les­son?

“Amer­ica’s credit card bal­ances have never been higher, but there’s no rea­son to think they won’t just keep climb­ing,” Schulz said. “Com­bine that with steadily ris­ing in­ter­est rates, and you have a po­ten­tially volatile mix.”

In “The Life of Rea­son,” the late 20th-cen­tury philoso­pher Ge­orge San­tayana wrote, “Those who can­not re­mem­ber the past are con­demned to re­peat it.”

You’ve seen vari­a­tions of this quote, but let’s look at it in the full con­text.

“Progress, far from con­sist­ing in change, de­pends on re­ten­tive­ness,” San­tayana wrote. “When ex­pe­ri­ence is not re­tained, as among sav­ages, in­fancy is per­pet­ual.”

Let’s stop here. Not­with­stand­ing the com­par­i­son to “sav­ages,” San­tayana made a keen ob­ser­va­tion about the im­por­tance of learn­ing from ex­pe­ri­ence to grow.

There’s so much we can glean from our fail­ures.

“One fact we ob­serve is that both the Great Re­ces­sion and Great De­pres­sion were pre­ceded by a large run-up in house­hold debt,” wrote econ­o­mists Atif Mian and Amir Sufi in “House of Debt: How They (and You) Caused the Great Re­ces­sion, and How We Can Pre­vent it From Hap­pen­ing Again.”

The re­searchers ar­gued that con­sumer spend­ing dropped be­cause peo­ple were so heav­ily bur­dened by hous­ing debt. “As it turns out, we think debt is danger­ous. If this is cor­rect, and large in­creases in house­hold debt re­ally do gen­er­ate se­vere re­ces­sions, we must fun­da­men­tally re­think the fi­nan­cial sys­tem. A fi­nan­cial sys­tem that thrives on the mas­sive use of debt by house­holds does ex­actly what we don’t want it to do — it con­cen­trates risk squarely on the debtor.”

Peo­ple are go­ing to bor­row. De­spite my ha­tred of debt, I un­der­stand the role it plays in our econ­omy. It drives auto sales, and so many peo­ple rely on their ve­hi­cles to get to work. With­out mort­gages, most Amer­i­cans, in­clud­ing my­self, would not be able to pur­chase a home. Debt also al­lows peo­ple to get col­lege de­grees.

But an ex­ces­sive re­liance on debt is bad for both the econ­omy and house­holds.

So how do you know if you’re tak­ing on too much credit card debt?

Fol­low this one rule, and you’ll stay within a rea­son­able amount: Don’t charge any­thing you can’t pay off by the next due date. If you can’t pay off the bal­ance, you can’t af­ford what­ever prod­uct or ser­vice you’re pay­ing for with that card.

I also cau­tion peo­ple against pro­mo­tional deals where you are given ex­tended time to pay off credit card charges in­ter­est-free. Far too of­ten, I see peo­ple who get to the end of the time al­lot­ted and can’t pay off the card.

There were a num­ber of fac­tors that led to the re­cent fi­nan­cial cri­sis. Credit wasn’t the only cul­prit. But those who suf­fered the most were peo­ple liv­ing the Amer­i­can Dream on credit. We can­not af­ford to for­get the lessons of the Great Re­ces­sion.

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