When Mark Young graduated from the University of Maryland, he had just $300 in his checking account, and no money to pay for graduate school at Stanford, where he had just been accepted. But the 22-year-old was far from broke. With $5,000 in credit on his MasterCard and Visa credit cards, Young had no trouble paying for his first semester at Stanford last year. He charged it.
Young finished his graduate program with the help of a scholarship, but he hasn't found a job, and therefore has no money to pay off his credit card accounts. He symbolizes a potential threat to the health of the nation's banks and savings and loans -- the possibility that in a weakening economy, more individuals will have trouble paying their bills, making bad credit card and other forms of consumer debt a larger problem for financial institutions.
Burned by mounting losses on Third World loans, junk bonds and unsuccessful real estate deals, bankers have plunged deeper into the safe haven of consumer lending over the past decade.
The American public has responded eagerly to the banks' blandishments of easier personal credit. Since 1980, Americans' unpaid credit loans have grown from $300 billion to $795 billion today.
That makes Mark Young a rather typical credit card user. In fact, his semester at Stanford cost less than the consumer debt now carried by the average American household -- $7,500, which includes car loans.
"Consumers are more vulnerable to credit-related financial problems than they have been in decades," said Robert W. Johnson of the Credit Research Center at Purdue University.
The debt the public has incurred helped fuel the boom of the 1980s, which was built largely on consumer spending. Outstanding debt now totals 18 percent of after-tax income, the highest it has been since World War II. But if borrowing helped the expansion, Johnson said, it could become "a tremendous liability in a time of contraction."
So far banking regulators have noted only a slight rise in consumer delinquency rates. But they are carefully monitoring consumer lending and are asking bankers to do the same.
Consumers themselves appear to be slowing their use of credit already. In August, the last month for which figures are available, consumer credit rose at a modest 3.4 percent annual rate, the Federal Reserve Board reported.
Bankers, too, are heeding the warning signs in the economy. Although they continue to extend additional amounts of credit, they are doing so at a slower rate than in the mid-1980s.
But recently released statistics show the unfolding economic slowdown is beginning to force consumers to delay paying their bills. Personal bankruptcies in the first half of 1990 are at a record level, according to the administrative office of the U.S. Courts.
In the Washington area, credit counseling centers report a jump in the number of consumers either worried about their debt or having problems making payments.
"A lot of people who thought they'd be OK are suddenly rethinking their lifestyles," said Ellen Stephens, a Chevy Chase accountant who volunteers part time to help residents with their personal finances. "When you're making $60,000 a year between husband and wife and you've racked up $160,000 in debt -- suddenly, the picture doesn't look so good."
Members of one Washington family who looked to Stephens for advice said it never occurred to them that the combined debt of their credit cards, home equity loan and college education loan could ever be a problem.
"I mean, here we are, making decent salaries, with a house and two cars and two kids," said Ethel Sherman of Bethesda. "But we've been living off plastic like everybody else. Now, with the real estate market in the dumps and the possibility of federal layoffs, we're really scared."
Never before has the economy entered a broad slowdown with so much debt. Normally, during a long economic expansion, the debt burden for governments, corporations and consumers diminishes. But not in the 1980s.
Today's record level of consumer debt is matched in the corporate sector, where debt amounts to more than 46 percent of corporate capital, up from 34 percent a decade ago, according to the Purdue Credit Research Center.
Much of the increase in consumer debt was sparked by a tremendous sales effort, credit experts said. To stimulate profits, banks, S&Ls and other consumer lenders began aggressively marketing debt, relaxing standards and extending credit to almost everyone, including millions of Americans like Mark Young who have few assets. Many, like Young, have happily taken advantage of what was offered.
For example, in the first eight months of 1990, a McLean couple received unsolicited credit card offers with credit lines totaling $53,000. Although the couple, who asked not to be identified, already had four credit cards, Chase Manhattan, Manufacturers Hanover, Citibank, American Express and Discover all offered more.
Growth of the use of credit cards has been encouraged by the range of retailers and service-providers that now accept them. For example, the U.S. Department of Labor accepts MasterCard and Visa in its cafeteria. The Internal Revenue Service allows Americans to charge their taxes. Restaurants like Kentucky Fried Chicken, McDonald's and Pizza Hut and national supermarket chains like Safeway all either accept credit cards or are testing the idea. A majority of doctors, dentists and hospitals in the United States accept credit card payments.
The combined unpaid balance on all outstanding cards is on the rise, averaging $2,042 per card holder -- up from $931 in 1980. Part of the increase can be explained by the effects of inflation.
The banking industry reported $3.7 billion in net bank card and related credit losses in 1989, up from $3.3 billion in 1988, according to the American Bankers Association. A recent ABA report showed that nearly half of all credit card losses are attributable to personal bankruptcy, up from a third only one year ago -- an indication of the potential impact of a serious recession.
Trends like these have helped persuade federal bank regulators to take a harder line on consumer credit.
Karen J. Wilson, deputy comptroller for the northeastern district for the Office of the Comptroller of the Currency (OCC), which oversees national banks, began warning in March that credit card loans were bubbles waiting to burst. This is because of the potential for consumers to use one credit card to pay off debt on other credit cards, a scheme that appears to reduce outstanding balances but does not cut the actual level of debt.
"Obviously we've got some concerns about consumer loans in areas where we're seeing some economic softening," said OCC spokeswoman Lenora Cross.
Cross said that even though regulators so far "are not seeing anything that looks very disturbing," the OCC is asking banks to make additional checks on payment behavior, using new computer models that will spot a sudden uptick in late payments or other patterns.
Although bankers declined to be quoted by name, several interviewed said they are concerned about the problems that could arise from consumer loans. Still, banks here and elsewhere forge ahead.
For example, after suffering heavy losses from real estate loans, MNC Financial Inc. is gearing up to nearly double the size of its credit card operations to about $13 billion over the next three years, according to analysts who recently toured the division.
So far, MNC, the parent of American Security Bank, Maryland National Bank and Equitable Bank, has experienced minimal losses on its credit cards, with charge-offs of about 2 percent, compared with an industry average of 3.5 percent to 4 percent.
Robert B. McKinley, publisher of RAM Research's Bankcard Update, an industry newsletter, said big credit card issuers like MNC will not suffer as much in the event of a recession because of their broad customer base and the high interest rates they charge.
"It's the little guys, the local bankers, who've made a big push into consumer lending that'll get hurt," he said.
Elgie Holstein, director of Bankcard Holders of America, a consumers group based in Herndon, said the dramatic rise in credit should be more of a concern for the debtor than for the lender.
"Many people have defended consumer credit in the last decade by saying that the increase in consumer debt is somehow offset by the increase in the value of our assets," Holstein said.
"But that argument doesn't hold water in a recession, when asset values tend to plummet and meanwhile, the burden of the debt doesn't disappear."