Maureen McClung is struggling to pay her bills as she adjusts to her new life as a single mother of six children.
In the middle of divorce proceedings, the Purcellville mother is two months late in her mortgage and car payments. She used to pay her credit card bills off each month, but now she can barely pay the monthly minimum. She tries to avoid late fees but is not always successful.
Having seen her household income drop from about $100,000 a year to less than half that much after her husband left in February, McClung, 43, thought about refinancing the mortgage on her old farmhouse to reduce her monthly payments and help ease her debt load. But she can't; the house is tied up in divorce proceedings.
And while she wants to go back to school to acquire some job skills, she is unsure what to study at a time of rising unemployment. "What is out there? The economy is so shaky, I don't know what field to go into."
McClung is among many American middle- and lower-income borrowers strained by debt as the economy slumps, according to the latest batch of economic data and corporate earnings reports.
While affluent homeowners are taking advantage of low mortgage rates to refinance their home loans and lower their monthly bills or pay off debt, borrowers who live from paycheck to paycheck are more vulnerable to the kinds of setbacks -- divorce, illness, job loss -- that can make debts more overwhelming.
These borrowers' problems, in turn, add to the financial woes of the companies that lend to them and may signal trouble for the entire economy.
Companies that serve lower-income borrowers and those with bad credit histories, known in the industry as subprime borrowers, recently reported a rise in troubled accounts. These companies said there had been an increase in the percentage of their loans considered credit losses -- loans more than 180 days overdue and that they consider a financial loss -- in the third quarter from the same time period a year ago. And many also reported a rise in the percentage of loans that were "delinquent" -- those whose payments are 30 or more days late.
As a result, many of these companies' earnings have dropped. They include lenders such as Metris, Providian Financial Corp. and AmeriCredit Corp., whose average customer earns around $45,000 a year. In the case of Metris, the nation's 10th-largest credit card firm, the loss was $1.3 million for the quarter, compared with a profit of $70,736 a year earlier.
Meanwhile, Sears, Roebuck & Co. surprised Wall Street by announcing sharply reduced third-quarter earnings in part because it had to increase its allowance for uncollectable credit card accounts by $189 million. As Sears's chief executive Alan J. Lacy explained to financial analysts recently, the "credit business might be headed for a more troublesome spell than we had anticipated."
Credit card experts and financial analysts say part of Sears's woes lies with company -- that it failed to properly manage its credit card portfolio as it tried to grow aggressively over the past two years, converting many holders of its Sears department store credit card to users of a Sears Gold MasterCard. While the basic Sears card is primarily for Sears purchases, the MasterCard can be used to charge purchases elsewhere and permits balance transfers and cash advances. The consumers who took advantage of balance transfers and cash advances had higher default rates, Sears officials belatedly discovered.
Sears executives also noted that a significant portion of its portfolio is "middle America consumers," whom the executives declined to describe in more detail other than to say they are the ones "more sensitive" to a deteriorating economy.
By contrast, lenders who cater to more affluent consumers, known in the industry as prime or above-prime customers -- firms such as MBNA, whose average customer earns about $70,000 a year -- are posting better-than-expected earnings, and lower levels of credit losses and/or delinquencies since June even though credit losses typically climb in the July-through-September quarter. Other firms in this group include Bank of America, Bank One, Citigroup and Wells Fargo. Increased credit card spending also helped American Express, whose third-quarter earnings more than doubled to $687 million. Several firms, such as Bank One, Wells Fargo, MBNA and American Express, also saw lower credit losses in the third quarter compared with the same quarter of last year.
"An early read on third-quarter earnings suggests a bifurcated credit performance," said Caren Mayer, a specialty finance analyst with Banc of America Securities, which is owned by Bank of America and has banking relationships with many credit card firms.
"It's clear that subprime customers appear the most pressured, while the prime segments appear to be holding up better," Mayer wrote in a recent report. "Part of what we believe is driving increased delinquencies is the continued weak labor market and recent acceleration in jobless claims. This could affect the subprime segment more heavily, as these customers live paycheck to paycheck."
Mayer pins some of the blame on the subprime lenders, for their underwriting standards. "Many of these customers were underwritten at the peak of their earnings. The economy was strong and anyone who wanted to work a second job was and anyone who wanted to work overtime was. . . . Then, when the economy weakened, these customers lost their second jobs and their overtime, pushing them to credit problems."
Nationally, credit card delinquencies rose to 3.91 percent of all accounts in the second quarter, the latest period for which figures are available, from 3.88 percent in the first three months of the year, according to the American Bankers Association. Auto-loan delinquencies also rose, to 2.36 percent in the second quarter from 2.29 percent in the first quarter, while mobile-home loan delinquencies rose to 5.81 percent in the April through June period from 4.84 percent in the previous three months. By contrast, home equity lines continued to be the loan category with the lowest level of delinquencies: 1.28 percent, the same as the first quarter.
David Robertson, publisher of the Nilson Report, which tracks the credit card industry, said the latest round of corporate earnings is in part a reflection of the aggressive marketing by companies seeking new customers. "We have come to a period in the industry where unsecured revolving credit has been offered to just about everybody. That's very egalitarian, but those people at the bottom suffer the most when the hard times hit. They don't have the safety nest that other people have."
Meanwhile, a similar difference between higher-income and lower-income homeowners and the way they are handling their debts is starting to become apparent, economists say. The delinquency rate on Federal Housing Authority loans -- generally given to lower-income first-time home buyers -- was 11.81 percent for the second quarter, more than triple the 3.1 percent delinquency rate for conventional mortgages granted to homeowners with better credit histories.
Overall, the percentages of American homeowners entering foreclosure or somewhere in the process, although low, both hit 30-year highs in the second quarter, the Mortgage Bankers Association reported. The rate for those entering foreclosure edged up slightly to 0.4 percent in the April through June period from 0.37 percent in the previous quarters. Mortgages in foreclosure rose to 1.23 percent from 1.11 percent in the first quarter.
"With mortgage rates down [recently] to 6 percent, there's been a wave of refinancings and one benefit of that is it has enabled some families to consolidate some of their other debts and help strengthen their household balance sheet," said Frank Nothaft, chief economist at Freddie Mac, a public corporation chartered by Congress to ensure sufficient mortgage funds in the country. But, he added, the refinancings have also "left behind a pool of consumers who don't have the flexibility to refinance and that may well show up in terms of higher delinquencies and write-offs for financing companies."
As delinquency rates rise, many economists worry that more consumers -- whose spending has helped prop up the economy in the past year -- will start trimming their purchases, particularly if the job market remains feeble. And that, in turn, could be bad news for an already weak economy.
"I'm concerned about the larger segment of consumers who are not credit-impaired yet and may not be but nonetheless will cut back on consumer spending," said David Resler, chief economist of Nomura Securities International Inc.
Resler noted that home refinancings have helped keep consumer spending strong. But eventually, "people who intended to refinance have probably done so," Resler said. At some point, "we will start to hit saturation."
As a result, he said, "I think we're going into a slower growth in consumer spending, and a slower growth in the economy."
ABA chief economist James Chessen said he remains concerned. "My worry is that the cumulative effect of layoffs and difficulty to get back into a job has pushed many people to a point where it is very difficult to meet obligations."
That's already happened to Dawn Harden, a former WorldCom Inc. employee who lives an Atlanta suburb. The single mother of three lost her $60,000 job as a business analyst in June and has been unable to find a new one. She used to use her credit card a lot -- and pay at least three to four times the monthly minimum. Today, she pays only the minimum due and tries not to use her credit cards at all -- "for fear I can't pay them off."
And she worries about the future. "If I don't find a job by the end of December -- that's when my unemployment runs out -- I'll be in a real pickle."
Anitha Reddy contributed to this report.