As the Federal Reserve continues its “measured” interest rate increase, households across the nation are bracing for the impact. More than 50 million adults are in credit card debt, an economic problem that causes stress and at its worst, financial ruin. It helped drive the refinancing boom, as families cashed out equity at record levels in a modern-day version of robbing Peter to pay Paul. Most people would be stunned to learn that more children will now suffer through their parents’ bankruptcy than their parents’ divorce. The rise in household debt spells trouble for both our families and the future economy.

Almost two-thirds of the economy is driven by consumer spending, so any economic recovery hinges on Americans buying, buying, and buying some more—whether it’s homes, groceries, or prescription drugs. But in this fragile economy characterized by slow wage growth, rising costs, and job instability, American families are keeping the consumption engine humming by taking on more and more debt. Some economists are concerned about the sustainability of an economy that’s literally built on a house of cards. We should also worry about how households will cope with rising rates and swelling debt payments.

The picture of debt in this country mirrors the overall trend toward greater economic inequality. During the big boom of the 1990s, upper-income families accumulated massive new wealth through capital gains in the stock market. Meanwhile, average working families had exactly the opposite experience: pinched by stagnant real wages and rising living costs, they were able to save less and less, and began borrowing to make ends meet. While the rich were getting fat returns on their investments, the rest of Americans were paying interest charges just to keep the household running.

At the end of 2003, families owed more than $750 billion in credit card debt—an average of $12,000 per indebted household. Dēmos’ analysis of Federal Reserve data show that between 1989 and 2001, middle-class families saw their credit card debt increase by 75 percent. For the lowest-income families, credit card debt grew by a whopping 184 percent over the decade. Credit card debt among seniors grew by 149 percent. And overall debt levels recently rose above annual disposable income for the first time ever. Spikes of this level invite the question: why are so many families going into debt?

It is not that Americans are spending willy-nilly. Unfortunately, the problem is much deeper and harder to solve than bad spending habits. Like the proverbial canary in the mine, the increased debt levels of low- and middle-income families are symptoms of greater economic problems facing our society. Over the last decade, the average family has seen dramatic increases in health premiums, housing costs, college tuition, and child care. But wages haven’t risen as fast and are now declining for many workers. The new decade brought a recession, rising unemployment and state funding cuts—a triple whammy for the already struggling middle class.

Today’s working families are using credit cards to plug the hole between their costs and their incomes—and then transferring that debt to their mortgage, putting their home at risk if hard times return. Between 2001 and 2003 alone, families cashed out $333 billion worth of home equity. But because the underlying economic pressures hitting families haven’t been addressed, most of these families will be in credit card debt again. And they’ll pay dearly. As families have become more economically vulnerable, the credit card companies have responded by bilking customers with escalating rates and fees that push balances upward—making it nearly impossible for families to get out of debt. More and more households are falling behind on their credit card bills, with delinquencies steadily rising over the last three years. Personal bankruptcy filings also reached record highs in 2003. Over 1.6 million households collapsed financially last year, an 11 percent increase since 2001 and more than double the bankruptcies in 1990.

Should we be worried? According to Federal Reserve Chairman Alan Greenspan, absolutely not. Household financial balance sheets are still healthy, despite the warning signs of rising bankruptcies, delinquencies, and continued growth in credit card debt. In a February speech, Greenspan actually argued that the surge in mortgage refinancing likely improved rather than worsened the financial condition of the average homeowner—allowing households to pay off more expensive consumer debt or to make purchases without using more expensive types of credit.

It’s hard to argue with the most famous and powerful economist in the nation, if not the world. But if you venture beyond the statistics, you’ll learn that families are overwhelmed by their debt and scared for their futures. They are worried about paying the bills, keeping their job and their health care. And after a decade of building up debt, they’re worried that the next time a spouse gets laid off, the car breaks down, or a child gets sick, their safety net will finally break. That’s the real truth about household debt in America.

Tamara Draut is director of the Economic Opportunity Program at Dēmos, a national public policy organization.

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