Credit Cards Become Risky Safety Net

By Karl B. Hille and Kelsi Loos

COLLEGE PARK – It wasn’t bad investments or even an emergency that pushed Dennis and Stephanie Bradshaw close to a credit default. It was simply having a baby.

When the Bradshaws brought their second son home to Gaithersburg in July, 2010, $4,000 of the $10,000 hospital bill was not covered by his insurance. The family set up monthly payments with the hospital, and soon began using credit cards to cover other expenses.

“Obviously, I was charging for diapers, which was a huge expense,” Dennis Bradshaw said.

The family kept charging food, gas, rent and other necessities until last April, when Dennis Bradshaw was paying more than $1,000 a month on five different cards at interests rates of 6 to 17.1 percent.

They cut back on expenses — Target brand instead of Pampers and bag lunches instead of McDonalds — but it wasn’t enough.

To make ends meet, Stephanie Bradshaw asked her grandmother for help, and she gave them a cash gift. Dennis Bradshaw’s mother also helped out with a series of cash gifts. His tax return went straight to the credit cards too.

He said he should be able to pay off his Bank of America card soon. But without a bare-bones budget and the generosity of relatives, the Bradshaws could easily have fallen into a cycle of default that has ensnared many.

Basic costs like housing, day care, transportation and medical needs rose twice as fast as wages in Maryland over the past decade. Many families have used credit cards to bridge the gap — even at the expense of paying the mortgage.

Unable or reluctant to seek government financial assistance, families are turning to credit as their safety net, state officials and advocacy groups say. As a credit card becomes more crucial to getting by, credit-card debt is taking the place of mortgage payments as a top priority for repayment.

“Credit cards are no longer being used for just discretionary purposes. People need their credit cards to buy gas, to function and go to work,” said Mark Kaufman, commissioner of the Maryland Division of Financial Regulation.

The credit card has become such a survival tool, and mortgages have become such a losing investment for a broad portion of homeowners, that plastic has achieved new importance and priority in people’s day to day lives, Kaufman said.

“Usually you pay your mortgage debt at the expense of their consumer debt. Now people are paying their credit card before they pay their mortgage,” Kaufman said. “As home values deteriorate, you have less incentive to keep paying on that.”

Credit-reporting agency TransUnion verified Kaufman’s claim. Last year, Maryland ranked near the high end of mortgage delinquency – with more than 7 percent of loans in default by the end of 2011’s fourth quarter. On the other hand, the agency reported that credit-card defaults fell even while credit-card debt continued to rise, leading some to conjecture that people are more careful to pay down their debt as the card becomes more important to getting by.

The Federal Reserve Bank of New York Consumer Credit Panel reported in 2010, that people may use their credit accounts to “smooth their consumption” in the event of a job loss, leading to more borrowing.

Marylanders racked up some of the highest rates of credit-card debt per capita, according to a 2008 study by the Corporation for Enterprise Development, a nonprofit think tank.

The average Maryland borrower owed $13,145 on credit cards at the end of 2011, including retail cards and other lines of credit. About 5 percent of borrowers were 90 days or more past due on their payments, according to the study.

Government assistance programs could help some to bridge the gap between wages and costs, but many working families make too much to qualify. The state saw a 43 percent increase in people seeking help from its Temporary Cash Assistance program between 2008 and 2012, but two-thirds were turned away as ineligible.

Others may be uncomfortable asking for help, state officials say. Instead they charge the difference between their salary and their costs.

“People are embarrassed. The last thing in their comfort zone is going to their neighbor and asking ‘How do you get public assistance?,’” said Ian Patrick Hines, the communication director for Maryland’s Department of Human Resources.

Medical Debt

Robin McKinney, director of the Maryland CASH Campaign, an organization that promotes financial stability for low-income families, said her clients have become much more likely to charge medical bills as they lose insurance coverage at work, lose their jobs, or start their own businesses.

“We see a lot of credit card debt that’s really medical debt. People need credit and they need it now. When an emergency happens… they don’t have enough money they have to pay for it,” said McKinney.

Borrowers without insurance will pay their bills on credit, then suffer the effects of stress caused by dealing with those debts. “It’s the spiral effect,” said Sarah Johnson, director of the Baltimore CASH campaign.

Dennis Bradshaw had insurance through his account managing job at a high-volume printing company, but coverage was cut back through that plan because of rising health-care costs, he said.

While he could rely on family and save his way out of debt, people with long term-medical conditions or disabilities can’t always work their way out of medical debt, as the expenses keep piling on.

A 2008 survey of low and middle-income households by the Access Project, a Boston-based nonprofit that aims to improve health-care access, found that half of medically indebted families used credit cards to pay for basic living expenses in the past year because they did not have enough money in their savings. Only one in five people without medical debt did so.

Families with medical debt owed an average of $2,194 on credit related to medical expenses.

Defaults: The Vicious Spiral

Consumer advocates warn that this tendency to rely on credit for basic needs could lead to late payments or defaults, subjecting the borrower to higher interest and more fees.

“The bottom line is that time is of the essence if a person is facing mounting debt,” McKinney said.

Jason Flanagan, 31, learned that lesson the hard way. He began depending heavily on his credit cards in 2005 and 2006. The plastic helped him catch up from week to week as he juggled multiple jobs, college classes and a growing family with one young daughter and a second on the way.

“We’d use it to pay a bill, or — I was going to school at the time — I’d use it for school stuff,” said Flanagan, 31, of Greenbelt. “We never used it for cruises or fancy vacations or big screen TVs. We just used it to pay bills.”

Flanagan said he defaulted on two credit cards before he could finish his degree, and the financial pressure was part of the reason for his divorce.

His credit history limits Flanagan’s options. He cannot buy a home or move to a bigger apartment to accommodate his two daughters when they come to visit every other weekend.

Learning to get by without credit has forced some financial discipline on him. Yet despite his credit card history, he said he still gets offers in the mail. Not as much as before the recession, the offers he does get are for subprime credit cards — those with interest rates around 24 percent.

More than half of Marylanders have taken such offers, said the CASH Campaign’s McKinney. With high interest rates, it becomes harder and harder to pay down debt and mounting fees.

“Creditors aren’t going to go away. Interest and fees will accrue. Collection activity will worsen and often times people find themselves in a deep hole very quickly,” said Deanna Booker of the Consumer Credit Counseling Service, a financial education nonprofit group. “The idea is to start working on digging out of the hole as quickly as possible.”