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Despite the credit splurge, the total net worth of American households is on the rise. Economists estimate that it grew by $360 billion in the final quarter of last year; it is expected to increase by an additional $200 billion during the first three months of this year. Main reason: the red-hot stock market. Since September, the Dow Jones industrial average has jumped 39%. The rally creates what economists have dubbed the wealth effect. Many people are richer, at least on paper, and so they feel ready to spend. Last week, though, the market retreated. After rising 16.29 points on Thursday, to hit a record peak of 1804.24, the Dow fell nearly 36 points on Friday, closing the week at 1768.55. Though the market's prolonged rise has fattened pocketbooks, the new wealth is not evenly distributed. No precise studies have been done on the subject, but economists are convinced that stockholders whose investments have greatly risen in value are not the same people who face stacks of unpaid bills. The booming stock market, in short, is not enriching the vast majority of the households that are deeply in debt.
Indeed, many consumers are more strapped than ever. Paul, a Chicago bank employee, makes $34,000 a year, but his wallet is more often bulging with his 15 credit cards than with cash. He has piled up $10,000 in credit-card - balances and consumer loans, and five months ago, he obtained a $128,000 mortgage to buy a town house in Chicago's tony Lincoln Park. His monthly payment: $900. Says Paul: "I'm really living beyond my means, and it's all coming to a grinding halt. I'm making barely enough to get by." Borrowers often imagine that inflation will bail them out of their obligations. That was a reasonable expectation throughout most of the 1970s, when debtors could rely on persistently rising prices to reduce the real value of their liabilities. These days, though, as inflation is running at a modest 3.5% annual pace, such hopes have been dashed.
Debtors often complain that their fall into the credit trap was facilitated by overly aggressive banks and credit-card companies. Says Paul Black, director of research for a national publication, whose debts compelled him to declare personal bankruptcy three years ago: "Banks were literally forcing their credit on me by mail." Luther Gatling, president of New York-based Budget and Credit Counseling Services, concurs. Says he: "Half the blame for the debtors we help should go to the lending institutions." Some banks do not seem to care how many cards a potential customer already has. Cardholders now carry an average of seven cards, according to the Nilson Report, an industry newsletter.
The motivation behind the bankers' credit-card push is no mystery: the business provides handsome profits, mostly as a result of the hefty 18% to 22% interest charges commonly levied on cardholders' outstanding balances. Those rates have remained largely unchanged, even as charges on other consumer loans have been recently pared. At New York City's Manufacturers Hanover Trust, for example, interest rates on some fixed-rate home improvement loans were last week reduced from 14.5% to 13.5%. At Bank of America, rates on home equity loans of between $15,000 and $24,000 were cut this month from 12.75% to 12%. As a result of such declines, most banks are now making more money on their credit cards than on other consumer loans.