Credit We Don’t Deserve

We are a nation of debtors. Need proof? The American household has an average of 13 credit cards that, as of December 2008, resulted in $1 trillion in outstanding credit-card debt. The Obama administration passed new legislation in May that soon will require credit-card companies to give people more notice before raising their interest rates.

In his new book Collateral Damaged: The Marketing of Consumer Debt to America, author Charles Geisst outlines the rise of what he calls the "Great American Credit Machine." The industry's marketing executives have been adept at framing the conversation, he says, by calling people's mounting bills "credit" rather than "debt." The credit-card companies, in turn, have made it seem like a privilege to hold their cards, a symbol of one's purchasing power. NEWSWEEK's Nancy Cook recently spoke to Geisst about Americans' mounting debt and the way new credit-card legislation could help consumers. Excerpts:

You talk about the way consumer debt has risen over three generations of borrowers. Why are people in such bad shape now?
There's always been this myth that we were a nation of savers who got misled. When the availability of consumer credit became a commodity, we certainly got in over our heads. Our debt ratios got higher and with rising state and local taxes thrown on top of it, people's fixed costs were higher. Having said all of that, we've been on a bender for the last 20 years and have been spending more than we earn.

You also consider mortgages part of Americans' consumer debt. But, aren't mortgages different?
When one's back is against the financial wall, people have been defaulting on their mortgages and letting the home default to the lender. They'd rather do this than default on their credit card. From 2000 and onward, people were using their home-equity lines to pay off their credit-cards bills to reduce the interest on their credit cards. Then, they'd congratulate themselves by going out to dinner. They're not realizing that they're eating part of their house at the same time.

Why would people do this?
People use credit cards as a source of working capital. They fund everyday living on their cards. It's better to preserve the one line that you have left.

How has the marketing of credit cards played into Americans' debt problem?
Commercials paint it as a privilege to be a member. They emphasize the positive, by saying, "This shows your purchasing power." I think that's been one side of it—to stroke people's emotions. The credit-card companies are also very good at designing statements that can't be read. So, basically, it's been slick marketing and deceptive billing practices.

The Obama administration has passed legislation that will put tougher standards on credit-card companies. What effect will this have?
It's going to be getting rid of deceptive practices. If credit-card bills can't be read by a 16-year-old kid, then something is wrong with them. But, it leaves open the matter of interest.

What would you do to lower the amount of debt people have?
We need to reinstate a national usury law for consumer interest. There's no reason why we can't do this. Ideally, it would cap interest so that it doesn't exceed 12 or 13 percent. As far as resolving the crisis, I think the credit-card crisis is still looming. It will take a few years before people are completely stretched. Unemployment is the straw that will break the camel's back. The default rates already are twice what they used to be. I think it'll get worse.

How many people in this country are in credit-card debt?
There's about 300 million in the country, and the average household has about 13 credit cards or four per person. It's fair to say that if we multiply that by the population, then we have well over a billion credit cards floating around. In the later months of 2008, we had $1 trillion of consumer debt outstanding. Eighty-five percent of that was represented by credit cards and about $750 billion was actually securitized, meaning it wasn't in the hands of the original lender. What I find interesting is the numbers. Just before the Depression started in 1929, we had a population of 130 million people, and we had outstanding consumer credit of $6 billion dollars. It's clear that there's something going on here. People can't stop spending.