Testimony of Robert D. Manning, PhD

Hearing on AConsumer Bankruptcy,@

Before The Committee On The Judiciary,

United States Senate, February 8, 2001

I would like to thank the Committee for this opportunity to contribute to ongoing discussions over proposed legislative reforms of existing consumer bankruptcy law. As an economic sociologist, I have spent the last 15 years studying the impact of U.S. industrial restructuring on the standard of living of various groups in American society. Over the last 10 years, I have been particularly interested in the role of consumer credit in shaping the consumption decisions of Americans as well as the role of retail banking in influencing the profound transformation of the financial services industry. In regard to the former, my research includes indepth interviews and lengthy survey questionnaires with over 800 respondents. In terms of the latter, I have studied the rise of the credit card industry in general and the emergence of financial services conglomerates such as Citigroup during the de‑regulation of the banking industry beginning in 1980. The results of this research are summarized in my new book, CREDIT CARD NATION: America=s Dangerous Addiction to Consumer Credit and are updated on my web site at www.creditcardnation.com.

The Explosion of U.S. Consumer Credit:

Long‑Term Performance Enhancer or Short‑Term Miracle Drug?

Like an athlete who uses steroids to temporarily exaggerate muscle mass and to boost physical strength, the U.S. economy has been perilously inflated through the enormous increase of debt over the last two decades. Across all sectors of U.S. society (household, government, corporate), access to easy credit has led to a pervasive dependence on debt, much like American's addiction to low cost energy supplies. And, like the myriad of medical maladies that eventually afflict steroid abusers, the negative long‑term consequences of societal debt have been neglected during the past decade of unprecedented U.S. economic growth.

Most Americans would be surprised to learn that total consumer debt, including home mortgages (over $6.5 trillion), exceeds the cumulative U.S. national debt ($5.7) trillion. And, like the sharp increase in federal borrowing that augmented the modest growth of federal revenues over the last 20 years (U.S. national debt totaled ($940 billion in 1981), consumers have become increasingly dependent on unsecured or Arevolving@ credit (about $55 billion in 1981) to compensate for stagnant real wages, increasing employment disruptions, and higher costs for big ticket items such as automobiles, college tuition, insurance, housing, and health/medical costs. Although the finance charges on the national debt have grown substantially (from $292.5 billion in 1993 to $362.0 billion in 2000), accounting for over 12 percent of the current federal budget, heavily indebted consumers are facing a more serious financial burden since their loans are more likely to be in the form of higher interest credit cards (average of over 18% APR) versus more modest Treasury bonds (5%‑6%).

At the same time that Aone‑stop@ financial shopping has provided greater convenience and lower prices for a small minority of U.S. households, the most economically disadvantaged or financially indebted are increasingly relegated to the Asecond tier@ of the financial services industry (pawnshops, rent‑to‑own stores, >payday= lenders) where interest rates typically range from 10 to 40 percent‑‑and more‑‑PER MONTH! Significantly, this fastest growing segment of the financial services industry features the participation of some of the largest Afirst‑tier@ banks such as Wells Fargo, Goleta National Bank, and Bank of America. To the dismay of most Americans, the deregulation of the financial services industry has led to record revenue growth and profits for banks while providing more complex pricing systems, less personalized service, and sharply increased costs to the majority of consumers. In sum, while U.S. wages in general and household income in particular have typically declined over the last two decades, the effective demand of American consumers has been enhanced by their access to increasingly higher cost credit. This trend is especially significant since the U.S. post‑industrial economy has been fueled by the growth of consumer related goods and services‑‑accounting for about 2/3 of America=s economic activity (Gross Domestic Product). As long as U.S. consumer demand has increased, stagnant real wages (from mid‑1970s to late 1990s), declining labor benefits (health, pension), and the growth of temporary or "contingent" workers (from 417,000 in 1982 to 1.22 million in 1989 and to 2.65 million in 1997) have been obscured by the unprecedented extension of consumer‑‑especially Arevolving@ credit.

Like steroid abuse, the dramatic decline in the U.S. personal savings rate (from nearly 8.5% in the early 1980s to less than zero today) and the sharp rise in consumer debt could have long lasting effects on the U.S. economy. Since the end of the last recession (1989‑91), the Federal Reserve reports that total installment consumer debt (credit cards plus consumer loans such as autos and appliances) rose from $731 billion in 1992 to about $1.5 trillion today. This includes a huge increase in unsecured credit card debt: from $292 billion in 1992 to $654 billion at the end of 2000. A remarkable trend since credit card debt was only $50 billion in 1980. Together with the sharp increase in stock market valuations during the 1990s ("wealth effect") and the corporate promotion of immediate gratification ("Just Do It" consumption) which inflated consumer expectations, Americans have tended to purchase more than they could possibly afford on their household income. Not surprisingly, this was facilitated by the aggressive marketing of bank and retail credit cards to traditionally neglected groups such as college students, senior citizens, and the working poor. It is sobering that the recent decade of economic growth and falling unemployment has featured a perplexing phenomenon: personal bankruptcy rates in the late 1990s (peaking at 1.4 million in 1998) soared to nearly ten times the rate of the Great Depression.

Not only are most U.S. households being squeezed by mounting mortgage and consumer debt, but the "real" cost of borrowing has risen dramatically since the de‑regulation of banking in 1980. For instance, the real cost of corporate credit (prime rate) has increased only marginally (2.5%‑3.0%) whereas the real cost of consumer credit card debt has more than doubled (less than 6% to over 11%) since the early 1980s‑‑not to mention soaring penalty fees (about one‑third of all credit card revenues). Furthermore, even the robust wage increases of the last three years do not compensate for the rising cost of financing personal debt; only home mortgage related interest is tax deductible.

Today, three out of five U.S. households are responsible for the approximately $560 billion in outstanding credit card debt. Among these "revolvers," credit card debt averages over $11,000 per household. Hence, a four percent increase in the annual median income of U.S. family households (about $50,000) is nearly the same as the average cost of financing household credit card debt (18% excluding fees) or approximately $2,000. And, this does not include the tremendous growth of finance companies (over 24% APR) and the rising cost of "second‑tier" banks. The enormous profits of the latter explain the recent entry of the largest "first‑tier" banks into providing second‑tier financial services. For instance, Wells Fargo formed a joint venture with Cash America (largest U.S. pawnshop company) in 1997 to develop a state‑of‑the‑art system of automated, payday loan kiosks. Overall, credit card interest charges, penalty fees, and second‑tier finance costs could total over $140 billion in 2001. This is an enormous transfer of income to an industry that has slashed jobs, cut wages, and raised consumer prices. In terms of sustaining the current economic expansion, the effect could be a significant reduction in the effective demand of U.S. households as the purchase of goods and services is subordinated to the payment of rising finance charges attributed to previous consumption.

Before reporting on the experiences of people who have been encumbered with high levels of consumer debt, it is important to note the recent trends and institutional policies in the consumer financial services industry. First, in contrast to descriptions of the credit card industry as highly competitive with 6,000 competitors, the reality is that the last decade has witnessed a dramatic consolidation of credit card issuers. In 1977, the top 50 banks accounted for about half of all U.S. credit card accounts. The impressive revenues of most credit card portfolios has precipitated massive mergers and acquisitions over the last decade. For instance, Banc One=s acquisition of credit card giant First USA in 1997 was followed by Citibank=s purchase of AT&T=s credit card subsidiary‑‑the eighth largest in 1998. Today, the top ten card issuers control over three‑fourths of the credit card market and nearly 70 percent of the over 1.3 trillion in credit card charge volume. Not surprisingly, competition for clients is less likely to be expressed in the form of lower prices. Indeed, it is striking that the average cost of consumer credit card debt has actually risen over the last five years.

Second, the enactment of the 1998 Financial Services Modernization Act has precipitated a new trend in the formation of consumer financial services conglomerates. For instance, the 1998 merger of Citicorp with Traveler=s Group has created a new role for consumer credit cards: compiling consumer information files. Credit cards provide a lucrative revenue stream for conglomerates such as Citigroup as well as strategic information for the cross‑marketing of other financial services such as insurance, investment services, student loans, home mortgages, and consumer loans. By combining different sources of consumer activities from various corporate subsidiaries (e.g. Traveler=s Insurance, AT&T credit cards, Solomon Smith Barney investments), plus the forging of strategic partnerships with specific corporate retailers, these conglomerates are developing increasingly cost‑effective marketing campaigns for persuading customers to use their credit for purchasing products from members of the conglomerate=s extended corporate Afamily.@ It is not surprising, then, that the major credit card associations recently have begun marketing credit cards to teenagers‑‑with the required financial contract signed by their parents or guardians. This card program is ostensibly designed to help promote financial responsibility by encouraging parents to discuss financial purchases/budgets with their minor children. Of course, financial education could be promoted through the use of debit cards or personal checks. Indeed, the key objective is to promote credit card use at an early age, especially purchases through virtual internet shopping malls. Furthermore, this credit card program facilitates the collection of consumer information at an earlier age as well as the direct marketing of teenagers without the filter and/or confusion of distinguishing the purchases of children from their parents. By issuing credit cards in a teenager=s name, companies are seeking to shape consumption behavior and corporate loyalties at an earlier age while minimizing the influence of their parents.

Third, the growth of subprime credit cards has led to outrageous financial terms for the most naive and inexperienced market of the working poor. With annual percentage interest rates of over 30 percent and costly Ahidden@ charges, even large issuers have been formally reprimanded and even sued over duplicitious advertising. For example, the sixth largest credit card issuer, Providian National Bank, agreed to an out‑of‑court settlement for a record $300 million in June 2000. According to the U.S. Comptroller of the Currency, John D. Hawke Jr., AWe found that Providian engaged in a variety of unfair and deceptive practices that enriched the bank while harming literally hundreds of thousands of its customers.@ They include a >no annual fee= program that failed to disclose that the card required the purchase of $156‑a‑year plan credit‑protection plan; customers who complained were informed that the plan was mandatory unless a annual fee was paid.

For those who desperately seek a credit card as a Abank account of last resort,@ the terms that are required of subprime applicants‑‑especially the working poor‑‑include unwanted educational materials and high membership fees with little available credit. This is illustrated by the conditions of the United Credit National Bank Visa. It=s direct mail solicitation declares, AACE VISA GUARANTEED ISSUE or we=ll send you $100.00! (See inside for details.)@ For those who bother to read the fine print, and a magnifying glass would be useful in this case, the terms of the contract are astounding,

AInitial credit line will be at least $400.00. By accepting this offer, you agree to subscribe to the American Credit Educator Financial and Credit Education Program. The ACE program costs $289.00 plus $11.95 for shipping and handling plus $19.00 Processing Fee ‑ a small price to pay compared to the high cost of bad credit! The Annual Card Fee [is] $49.00... For your convenience, we will charge these costs to your new ACE Affinity VISA card. [They] are considered Finance charges for Truth‑In‑Lending Act purposes.@

Unbelievably, an unsuspecting applicant could pay $369 for a net credit line of only $31 at a moderate 19.8 APR. It is no wonder that those households who are most desperate for consumer credit often give up on the financial services sector after they realize the exploitative terms of these contracts.

A final issue concerns the trend of consumer financial services conglomerates of replacing traditional, low cost consumer and small business loans with higher cost substitutes. For instance, in low‑income neighborhoods, this may result in the closing of a first‑tier bank branch and its replacement with high cost, finance companies (such as Citigroup=s newly acquired Capital Associates) or second tier Afringe banks@ such as check cashing outlets, pawnshops, and rent‑to‑own stores. Especially disconcerting is the application of this policy to the small business sector. Today, the number one source of start‑up financing for small businesses is credit cards followed by home equity loans. Aspiring entrepreneurs‑‑especially women and minorities‑‑are routinely denied small business loans and encouraged to assume higher cost, credit card debt. As one owner of a computer supply company explained, "I wanted a business loan [from Wells Fargo] but all I got was a[nother] credit card instead." This trend has potentially serious consequences as credit cards have dramatically changed from the credit of last resort to the initial source of start‑up financing. Since small businesses are the primary source of net job growth in the U.S. economy, this trend could have severe repercussions during the next economic downturn. That is, small entrepreneurs may not be able to survive unfavorable economic conditions after exhausting their high cost lines of consumer credit at the same time that the economy needs to generate more jobs. This restrictive corporate lending policy could exacerbate an economic slowdown and possibly contribute to a recession.

>Plastic Money for Real People=

‑‑‑ College Marketing Campaign by Associates National Bank

The lack of individual responsibility in the assumption of escalating levels of consumer debt is the cornerstone of the credit card industry=s argument for the reform of existing bankruptcy laws. The emphasis on Aif you play then you should pay@ belies the dramatic shift in the promotion of high interest, unsecured lines of credit which are most efficiently provided through universal or bank credit cards. As the credit card industry successfully increased the Areal@ cost (net of inflation) of consumer credit and saturated middle‑class households in the 1980s, the spectacular profits of the consumer‑debt driven economy led to banks to finance enormous marketing campaigns that sought to penetrate nontraditional markets in the late 1980s. The abrupt change in the industry=s underwriting standards for these loans raises the question of whether these new, far less stringent lending criteria are encouraging American households to borrow more money than banks know they can ever possibly repay. Ironically, these new groups tend not to be engaged in full‑time employment nor are they adequately educated on the lending policies of the financial services industry: college students and senior citizens.

In terms of college students, the lack of information on their consumer debt levels (obscured by student loans, private loans, direct parental payments, and other forms of family assistance), has led to the surprising discovery that the fastest growing group of bankruptcy filers is 25 years old or younger. The credit card industry has funded research studies that present an idyllic world of tech savvy and financially responsible college students that belie the escalating social problems associated with credit card debt. Through the Arose colored glasses@ of the credit card industry, which claims that approximately 3 out of 5 college students pay off their charges at the end of each month, the credit card is portrayed as a Aknight in shining armor@ a la Jerry Seinfeld=s advertisements for American Express. Instead, the flawed research methodology of these few industry sponsored studies ignores such crucial trends as the use of student loans to pay credit card debts (80% of college students are enrolled in public schools), surveys that explicitly exclude students that have dropped out of college due to high credit card debts, informal family loans or payments for reducing high interest credit card debt, supplementary private loans for paying off credit card debts, and inclusion of parents= credit cards (where students are secondary card users that are not responsible for monthly charges). Furthermore, by focusing on the lifestyle enhancements that credit cards offer to Amature@ students, public attention has been directed away from the social problems that have emerged from their unprecedented expansion over the last decade. These include physical maladies (from anxiety, excessive smoking and drinking, depression), parental authority conflicts, loss of scholarships due to extra jobs for monthly payments (low grades), job rejection, denial of auto and home mortgage loans, rejection for student loans for graduate and professional school, decline of apartment rental applications, increasing defaults on federal student loans, and, in the most extreme cases, student suicides; the latter was recently reported in a Sixty Minutes II program (www.cbs.com and www.creditcardnation.com). Not incidentally, the sharp increase in consumer debt among college students has defied the recent decline in consumer bankruptcies; last year, the number of bankruptcy filers 25 years old or younger jumped to nearly 150,000. In view of the enormous increase in consumer credit offered to college students and the ongoing slowdown in the U.S. economy, the experiences of recent college graduates offers instructive insights into industry responsibility in the rapidly growing group of bankruptcy files. Significantly, the case‑studies reported in my 1999 study include students whose parents emphasized the importance of credit as a convenience and debt as a moral vice. Even in these cases, the promotion of credit cards on college campuses‑‑where universities Aearn@ multi‑million dollar annual royalties for exclusive credit card marketing agreements‑‑quickly erodes cautious family values toward the use of consumer credit and the accumulation of debt.

For example, beginning with his middle‑class upbringing in Indiana, where his father inculcated the Midwestern values of frugality and debt avoidance, Jeff entered Georgetown University in 1995 with a commitment to conduct his financial affairs on a cash‑only basis. Initially, he socialized with students like himself‑‑from moderate income Midwestern families‑‑whom shared similar social backgrounds and cultural experiences. But, Jeff soon realized that he wanted to transcend his family background and enjoy the more exciting lifestyle of his more affluent and urbane friends such as his roommate. At first, his adherence to the >cognitive connect= (i.e., that his income/resources must determine consumption) made him Astand out@ among his peers. For instance, Jeff=s father always paid restaurant bills in cash. His motto is, Aif you don=t have the cash then you shouldn=t buy it.@ Jeff=s new friends, however, associated this behavior with the quaint and backward cultural practices of Depression era farmers. Rare is the situation when their parents use cash for common financial transactions.

This clash of cultures led Jeff to apply for a credit card. He received two credit cards his first semester including a Gold MasterCard. Although Jeff initially obtained his credit cards for convenience, he was impressed by the favorable response of others to his Gold credit card, AIt made me feel like I had made it... people treated me different when they saw [the Gold card].@ Jeff acknowledges that this new respect was premature, since he did not yet have a >real= job, but perceived it as an early recognition of his future social status as a graduate from a prestigious university. Significantly, Jeff first began using his credit cards like cash, paying off the balances at the end of the month, AWhy pay cash. [Afterall] what=s the point of having a credit card.@ His other reason for obtaining credit cards was for emergencies. Hence, as long as Jeff=s savings and loans could finance a carefree lifestyle, his credit cards served as a modern convenience that befitted his status as a student at an elite, private university. Of course, this situation quickly changed when his financial resources were exhausted in the fall of his sophomore year.

As a freshman, Jeff saw his credit cards as his best friend, an angel of mercy during crisis situations, AAt first, I decided that my credit cards would only accumulate debt in case of emergencies, such as being stranded in an airport and needing a [plane] ticket. After a while, I decided that it was okay to charge necessary things like books and other school related expenses... Then, after charging for >needs,= it was just so easy... I decided that it was okay to charge anything I damn well wanted.@ As his debt increased, with 8 new credit cards during his sophomore year, Jeff became disheartened. Although they enabled him to rebel against the strict social control of his father, Jeff was now encumbered with several thousand dollars of debt. Over time, Jeff confounded his pursuit of personal independence with the rejection of the cultural ethos of the >cognitive connect.= Afterall, he argued, consumer debt it is a common‑‑even modern‑‑trend of professionally successful people and Aeveryone else I knew was in debt... and so were many of their parents.@ Among his peers, they rationalized their indolent spending behavior by emphasizing Athe great jobs that we will get [after graduation] that will enable us to pay off our credit card [debts].@

At the onset of his college career, Jeff=s conservative Midwest background made him a most unlikely candidate for accumulating a large credit card debt. However, with tuition over $23,000 per year at Georgetown University, Jeff quickly exhausted the $40,000 Aloan@ that his parents saved for his college education. And, with a combined household income of over $100,000, his financial aid was primarily limited to student loans. Unlike students at less costly public colleges, moreover, Jeff was not able to transfer any of his personal debts into student loans. This is because Jeff=s student loans paid only a fraction of Georgetown=s tuition while his duties as an on‑campus resident hall advisor (RA) provided his room and board. Jeff=s family inculcated the importance of adhering to the >cognitive connect= of consuming only what could be paid in cash; credit card use was acceptable only if one had sufficient savings or earnings that Acould back up your purchases.@ Initially, Jeff succumbed to the temptations of credit cards for non‑economic reasons. They offer emotional security in case of personal Aemergencies@ and alleviate social status anxiety because Apeople treat me so much better when they see my Gold [American Express, MasterCard] cards.@ Jeff=s first credit card was an impulsive response to a Citibank advertisement Athat was hanging on the wall in the dorm.@ The Visa card offered a credit limit of $700 with an introductory rate of 4.9%. By the end of his freshman year, Jeff had received three credit cards which were used primarily for entertainment‑related activities.

The shift from using credit cards for convenience to financing an inflated standard of living was a normal extension of Jeff=s college experience. As he explains, AEveryone has to take on debt to go to college... everyone is expected to have student loans... Even in my Midwestern [culture] which emphasizes that debt is bad, college loans are viewed as good debt... Low interest rates... High price of college equals high value... [produces] a greater return on your investment.@ By the middle of Jeff=s sophomore year, he had exhausted his parents= college Aloan.@ At this point, he confronted a profound crossroads in his college career. Either he fundamentally altered his consumer oriented lifestyle or abandon his familial attitudes toward debt. Faced with the choice of losing his more Asophisticated@ and urbane friends, whom view debt as a necessary means to a justifiable end, Jeff easily accumulated 8 more credit cards in 1997.

The most striking feature of Jeff=s credit card use is how quickly he abandoned the virtue of frugality as a necessary means for establishing his own social identity outside of his father=s strict control. Afterall, the culture of consumption that permeates collegiate life views saving as a practice of Ahicks@ while debt is the Abreakfast of champions.@ By the end of his sophomore year, Jeff had accumulated a couple of thousand dollars in credit card debt. Instead of beginning his junior year with savings from his summer job, most of Jeff=s earnings were used to pay off his credit cards. Significantly, as his credit card balances rose, Jeff received congratulatory letters from credit card companies extolling his good credit history and raising his credit limits as a Acourtesy to our best customers@ so that he could avoid over limit fees. Although he has never earned $10,000 in annual income, the deluge of credit card offers obscured the fragility of his Jeff=s financial circumstances, Awith the constant arrival of new >pre‑approved= credit card applications AND the raising of my credit limits the credit card companies made it seem like [my level of debt] was okay... When I started to fall behind, I even received letters that allowed me to >skip a payment= because the company >understood= that sometimes debts can back‑up such as during the holidays.@ It was during this period that Jeff eagerly embraced the marketing ploys of the credit card industry so that he could accumulate @miles@ or Apoints@ for frequent flier and consumer gift programs. More importantly, this practice led to Asurfing@ or transferring debt from high to low interest Aintroductory rate@ credit cards.

As Jeff learned to Atread water@ by Asurfing@ in this period, he learned the next lesson of the credit dependent: the Acredit card shuffle.@ That is, paying his credit card bills with other credit cards through monthly balance transfers and >courtesy checks.= This acceptance of his new debtor status was Adisheartening... but I rationalized it by telling myself that everyone else is in debt... Afterall, I=m going to get a great job and pay it off.@ The Agood@ or Aresponsible@ credit card debt such as school related expenses, a personal computer, and work suits was soon taken over by entertainment on weekends, restaurant dinners, spring break in Florida and then London and Canada. With one ten‑day vacation costing over $5,000, AI even charged the passport application fee,@ Jeff found himself on the verge of exhausting his available cash and credit. Fortunately, the university credit union is willing to assist students like Jeff whom find themselves Adrowning in credit card debt... most of the people I know that go to the credit union are getting loans to pay their credit cards.@ Without the option of federally guaranteed student loans to service his credit card debts, Jeff received a $10,000 loan at a moderate 11.9 percent. This credit union loan essentially Abought some time@ for Jeff before entering the job market‑‑an option not available to most college students. Not incidentally, a condition of the loan disbursement was that $3,000 had to be used to pay off one of his credit cards. The balance of the loan was spent on school expenses as well as catching up on his other monthly credit card payments.

During his junior year, Jeff began to engage in riskier and more creative credit card schemes. For instance, he began Asurfing@ which entails transferring debts from high interest rate cards to those with much lower albeit temporary >introductory= rates. As Jeff learned how to lower his monthly payments through this technique, he began to exhaust his lines of credit. Instead of triggering cautionary warnings from his credit card companies, Jeff received new APre‑Approved@ credit card solicitations and congratulatory letters announcing that he had Aearned@ an increase in his credit limits. He even began receiving letters that encouraged him to miss a payment, such as during holiday gift‑giving seasons, while lauding his good credit history. These mixed messages are easy for college students to misinterpret. Indeed, Jeff rationalized that his accumulating debt was not very serious since the the credit card companies Amade it seem that everything was okay by sending new applications AND raising existing credit limits.@ During this period, moreover, Jeff became so dependent on ATMs (his parents never used them) that he did not even think about the transactional costs ($1.50‑$3.00). As cash advances became more frequent, he did not want to know that the fees and higher interest rates made their cost comparable to short‑term pawnshop loans. Eventually, he Ahit the [financial] wall@ when his meager stipend as a residence hall advisor made it difficult to send even minimum credit card payments. The $10,000 debt consolidation loan from the university credit union temporarily averted an economic crisis. But, this proved to be only a temporary financial Aband‑aid.@

Ironically, a contributing factor to his financial crisis was two failed business ventures with his roommate which were intended to eliminate their debts. The first was a service to translate resumes of Mexican and other Latin American students whom were seeking internships or applying to colleges in the United States. Encouraged by friends seeking their assistance, they purchased all the necessary office equipment of a high‑tech company: computer, fax machine, cell phones, executive chairs, high quality business cards and fliers, web site fees, P.O. box, and legal fees for incorporation in Delaware. After several months without clients and rapidly depreciating business technology, Jeff and his Apartner@ opted to Acut our losses@ and terminate the business. Each lost over $2,500. To add further financial insult, they had to pay additional legal fees to dissolve their corporation and are still paying the contract for their listing with an internet Asearch engine.@

Following this entrepreneurial debacle, they sought to recoup their losses through the stock market. Instead of becoming more cautious about debt, Aour credit cards allowed us to get too big for our britches@ According to Jeff, Amy roommate found out that his company was going to be bought out. So, he was convinced that we would make a quick profit if we bought some stock before [the acquisition]... a sure winner! We each bought $5,000 worth of stock with cash advances from our credit cards... with e‑trade we even saved on brokers= commissions... The company was bought‑out alright but then it was cannibalized and the stock fell... We each lost over $3,000.@ When asked why they pursued such risky ventures while still in school, Jeff responded, ABecause we could! The courtesy checks gave us the opportunity act on our impulses.@

By the end of Jeff=s junior year, the social empowerment provided by his 11 bank and 5 retail credit cards had changed dramatically: they had evolved from friends to foes. The social Adoors@ that they had previously Aopened@ were now increasingly closed. Jeff was Aso concerned about meeting the right people and fitting in with them... that [he] did not think twice about $50 bar tabs and spending spring break in London... To think otherwise would have meant certain social death.@ Fortunately, Jeff was forced to confront his situation after realizing that AI no longer had control over my credit cards. Now, they controlled me.@ The earlier freedom to Aact like an adult@ had been replaced with the financial responsibility of paying for his earlier excesses. Indeed, rather than enjoying his final year at college, Jeff is enduring social hell by working full‑time while taking a normal course load and applying/interviewing for jobs. He works at least 30 hours per week at two part‑time jobs (in addition to his position as a resident advisor) simply to make the minimum payments on his $20,000 credit card debt and $10,000 debt consolidation loan. Most of his friends have stopped calling to make plans for the weekend because he is Ashackled to my credit cards... I can=t go out with them like I used to because I have to work... ultimately, to pay for the fun that I charged on my credit cards a couple of years ago.@

Today, Jeff views his credit cards with complete disdain, AI hate them.@ He is delinquent on many of his accounts and has threatened to declare bankruptcy unless the banks offer him more favorable interest rates. Ironically, Jeff=s social odyssey of the last four years has brought him Afull‑circle@ in affirming his father=s mantra toward debt: Aif you can=t afford it, don=t buy it.@ What angers him the most about credit card marketing campaigns on campus is that they extol the benefits of >responsible use= but neglect to inform impressionable and inexperienced students about their Adownside@ such as the impact of poor credit reports on future loans and even prospective employment. This is crucial, according to Jeff, because he now understands that Athe credit card industry knows exactly what it is doing [in encouraging debt] while taking advantage of students whom are trying to learn how to adjust to living away from home, often for the first time... Let=s face it, how can these banks justify giving me 11 credit cards on an annual income of only $9,000. These include a Gold American Express and several Platinum Visa cards.@

Although Jeff does not dismiss his financial responsibility, he states that AI almost feel victimized... giving credit cards to kids in college is like giving steroids to an athlete. Are you not going to use them after you get them?@ Furthermore, as a dorm Resident Advisor (RA), Jeff emphasizes that the university offers an wide range of student informational programs and services but with one notable exception, Athere if nowhere to go for debt counseling... everything is discussed in Freshman Orientation or incorporated in Resident Advisor training and residence hall programs... AIDS, suicide, eating disorders, alcohol, depression, peer pressure, sex ed, academic pressures, learning handicaps... all but financial crisis management.@

As Jeff has Agone full circle@ in his attitudes toward credit cards, he is now coping with the unexpected Apain@ of his past credit card excesses. Over $20,000 in credit card debt (plus his $10,000 debt consolidation loan and over $30,000 in student loans), Jeff has washed ashore from his Asurfing@ escapades. Although working two part‑time jobs during his senior year, Jeff is now delinquent on several of his 16 credit cards. A business major, Jeff is anxiously awaiting the outcome of his job search. He is optimistic as some of his peers have already received starting salaries that range from $40,000 to $55,000 per year. In addition, several have received signing bonuses between $3,000 and $10,000. For Jeff, the latter is especially important because he plans to use this money to reduce his credit card debt.

Unfortunately, Jeff=s promising career is encountering obstacles from an unexpected source‑‑his credit cards. During a recent interview with a major Wall Street banking firm, Jeff was asked, Ahow can we feel comfortable about you managing large sums of our money when you have had such difficulty in handling your own [credit card] debts?@ Jeff was stunned. It was obvious that the interviewer had reviewed his credit report‑‑without prior notification‑‑in evaluating Jeff=s desirability to the firm. ACan you believe it,@ Jeff declared, Athey want an explanation about my personal finances in college and yet they lost over $120 million last year!@

In their decision not to offer him employment, Jeff wonders how much was based on his GPA and how much on the Ascore@ calculated by the consumer credit reporting agency. This is certainly not a potential consequence that is explained by the credit card industry when it exclaims, ABuild your credit history... you=ll need [it] later for car, home or other loans.@ As Jeff passes by the MBNA Career Center on campus, which is named after the credit card company that he owes several thousand dollars, the irony of his Acatch‑22@ situation is not lost on him, Ahow can I pay them back when their credit reports are hurting my chances of getting a good job!@ It is not surprising that growing numbers of students like Jeff are increasingly using sexual analogies in describing their unforeseen circumstances. More bluntly, they are denouncing the predatory policies of the credit card industry as a form of Afinancial rape.@

As Jeff=s experience shows, student financial strategies are becoming increasingly complex as credit card companies offer Athe [financial] freedom to hang ourselves.@ Even students at expensive private schools are finding ways to transfer their credit card debt into supplementary loans without the knowledge of their parents. This increasingly popular practice helps to explain the wide vacillation in student credit card balances due to infusions of cash from other sources of loans. In addition, Jeff demonstrates how access to credit facilitates costly purchases that would not have been considered under the financial constraints of a typical student budget. The latter is especially disconcerting. It reflects the strong influences of escalating peer consumption pressures as well as sophisticated marketing campaigns that target the youth culture. One of the most seductive is the Sony advertisement, ADon=t deny yourself. Indulge with the Sony [Visa] Card from Citibank... The official currency of playtime,@ Or, more succinctly, the ubiquitous NIKE slogan, AJust Do It.@ Although Jeff has so far avoided personal bankruptcy by securing a well‑paying job with a commercial real estate developer, he notes with concern that some of his classmates have already been laid off due to the slowdown of the economy. In fact, some of his highest salaried classmates have become victims of the Areality check@ that many dotcom companies are only recently confronting. If Jeff is forced into the ranks of the unemployed for an extensive period, he anguishes over the prospect that bankruptcy may be his most realistic option.

When the >Magic of Plastic= Expires:

Bankruptcy in the Age of Financial Ignorance

Unlike Jeff, Cris has not been so fortunate in evading the dangerous financial shoals of consumer bankruptcy. This situation is especially surprising since her parents are both medical professionals with a combined household income of over $100,000. At the University of Maryland, Cris enjoyed the freedom of college life (with its promotion of a consumer lifestyle) which contrasted sharply with the harsh discipline of living at home. At the time, Cris= parents were oblivious to her new college lifestyle since she was limited to her meager savings from high school. Unbeknownst to them, however, the credit card industry was aggressively expanding into the previously ignored market of Astarving students@ in the late 1980s. For her father, it was ludicrous to think that major banks would give essentially unsecured loans to unemployed teenagers whom lacked experience in managing their economic affairs or discipline in controlling their consumption. Ironically, he was naive when it came to student finances and bank loan policies. Indeed, banks were eager to make high interest loans to students and credit cards became their financial >vehicle= of choice. Ultimately, credit cards became the personal junk bonds of Generation X.

Cris= initial encounter with Aplastic money@ began early in the fall of 1989‑‑her first semester of college. Citibank Visa advertisements Awere plastered all over the university@ and she thought that there was nothing to lose in submitting an application. Besides, Cris was curious about the Apower of plastic@ since her parents would not permit her to use a credit card in high school and she did not want to provoke an argument by asking now. Furthermore, all of her friends were receiving financial assistance for college from their parents and thus they had considerably more discretionary resources for Aplay.@ Emboldened by the prospect of financial independence, Cris eagerly filled‑out the form which did not require the consent of her parents‑‑only a copy of her student ID. At the time, Cris was 18 years old and working part‑time at a telephone answering service for about $5.00 per hour. To her surprise, Citibank granted a $500 line of credit, which she immediately used to pay a large library fine and Abuy a bunch of clothes at the mall that I couldn=t otherwise afford.@ More importantly, Citibank=s decision had a much more profound impact on Cris than the monetary value of its loan because, AIt made me feel emotionally and financially mature... [The credit card] helped me become independent [in my relations] with my family and my friends... It made me realize that I deserved to be responsible. That I should not have to beg my stepfather for money or call my grandfather for [financial] help.@

Cris= new social and economic empowerment transformed her attitudes toward consumption and debt. No longer forced to Aearn@ the ability to consume through work related savings (>cognitive connect=), Visa also Aliberated@ her from the social control of her parents. At first, Cris limited her charges to school expenses and personal items. By the end of the academic year, Cris was routinely using her credit card for mall excursions, restaurant meals, bar tabs, concert and professional sports tickets, and weekend trips to the beach. These activities underscored Cris= newfound Afreedom@ and were reflected in her rising credit card debts. Indeed, the Apower@ of Cris= first credit card convinced her to get a second by the end of the fall semester and two or three more in the spring. During this period, Cris learned the flip side of the Apower of plastic:@ the need to refuel its financial engine with monthly infusions of cash. By the second semester, Cris= top priority was maintaining her lifestyle and she began working full‑time at the answering service company.

Not surprisingly, Cris= grades plummeted. For the first time in her life, she received a >D= and an >F= which resulted in academic probation from the university. As conflicts with Karl intensified over her social activities, Cris moved into an apartment with some of her college girlfriends. These additional financial pressures reinforced Cris= dependence on her credit cards. As her most dependent Aasset,@ Cris saw them as both her personal Asavior@ and Abest friend.@ When she needed economic help, they were always there for her. And, they did not ask questions about why she needed the money or moralize about her spending patterns. The only problem is that they are Ahigh maintenance@ friends with a small financial price to pay for their invaluable assistance. At least that was what Cris thought at the time.

Cris enjoyed a largely carefree summer and, to reduce her expenses, she enrolled in a local community college for the fall semester. Already over $3,000 in debt and earning only $5.00 per hour, Cris was deluged with APre‑approved@ credit card offers. She attributes her desirability to the credit card industry by her prompt remittance of minimum monthly payments. During this period, Cris began to view her credit cards differently. AAfter spending my paycheck, I used my credit cards like savings... I used them for everything ... books, tuition, gas, food, hotel rooms at the beach... whether for school, emergencies or simply to enjoy an evening with friends.@ This intermingling of credit and earnings was reinforced by unexpected situations such as car repairs and medical emergencies. Afterall, she had to get her car fixed in order to drive to work and her health deserved immediate attention or she could not perform her job.

During this period, Cris began to engage in more creative and costly credit card practices that would foreshadow her eventual debt crisis. First, she began to regularly use her credit cards to generate additional cash flow. This strategy usually entailed charging all of her friends= meals at a restaurant and then collecting their money afterwards. Second, she began to routinely take cash advances from her credit cards Awhen I realized that I could.@ Initially, Cris would use cash advance checks to pay bills like rent, utilities, or car loan. As she got further into debt, however, Cris learned a sophisticated version of the Acredit card shuffle.@ She would take cash advances at the end of the month and then deposit the money into her checking account so that she could send the minimum payments to the credit card companies. According to Cris, Ait got to the point where I had written down all of the PIN numbers of my credit cards and, at the same ATM, I would take cash advances and then deposit the money directly into my [checking] account.@ Significantly, this financial management Asystem@ was encouraged by her credit card companies whom profit from high interest rates, cash advance fees, and over limit penalties, AEvery time I began to bump against my limit, the banks would raise them. [Because of this practice] it did not become a crisis early when I could have realized the seriousness of my situation.@ At the same time, market‑ing inducements such as 10% off with a new retail credit card such as Hechts or a free Orioles bag with an application for an MBNA MasterCard were Atoo easy@ to pass up.

Over the next two years, Cris= credit card debt jumped from about $5,000 to over $15,000. Cris marveled as she reflected on how she was unaware of the amount of debt that had accumulated on her 8 or 9 credit cards: Aafter being relatively stable for a couple of years it just [tripled] overnight.@ She moved back with her parents to reduce expenses which now included payments on a stereo, VCR, and TV. However, the recurrent conflicts with her stepfathe