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Credit Cards: the beauty and the best


IN FEBRUARY 1950 A NEW YORK BON VIVANT NAMED FRANK MCNAMARA gave birth to the American creation called the credit card when he launched his Diner's Club (since taken over by the megalithic Citigroup). It began with just 200 members.

&nbsp&nbspa century later there are more than one billion credit cards in circulation, or more than four for every person in the United States. Credit cards today provide "financial convenience," as a recent Associated Press story put it, for 157 million Americans.

And then there's the downside -- as the AP also noted -- in the "millions of profligate spenders" pushed into "crushing debt and even bankruptcy."

In Humboldt County you don't have to look further than Arcata, where Consumer Credit Counseling Service (CCCS) is based, to learn of the seemingly endless horror stories.

When Rosie Wentworth, credit counselor and board member of CCCS, hears my story about a woman who had 18 credit cards "all maxed out," she says offhandedly, "Oh, that's not unusual. We had one client who had 33 credit cards. Just bookkeeping alone, trying to keep track of payments, was outrageous. A huge, huge account. I think his payment was over $4,000 a month."

Even that tale is topped by Winchell Dillenbeck, chief executive officer and founder of Consumer Credit Counseling.

"Probably the worst case I ever saw was a fellow who had $244,000 in debt," he relates. "He had 44 credit cards. He was on the (counseling) program for a year. He was a heavy-duty administrator; he made good money." He wound up suffering from "sleep deprivation" -- surely no big surprise -- had to take a leave of absence from work and ultimately went the bankruptcy route.

Dillenbeck, who is 49, found his way to Arcata on a circuitous trek from Long Island to Vermont to California, driving with a couple of friends who dropped out along the way, before meeting up with a friend in Arcata.

[photo of Winchell Dillenbeck] Winchell Dillenbeck, chief executive officer
and founder of Consumer Credit Counseling Service

In February 1987 he started his nonprofit credit counseling venture, which is affiliated with the National Foundation for Credit Counseling, because of what he describes as a "leaning to counseling and helping people." He had picked up a degree in "human behavior," which he describes as "a cross between psychology and sociology," from Newport University in Long Beach. "It's a four-year school," he notes, but he "finished it up actually through correspondence."

It is an anomaly of the nonprofit credit counseling service that its financing comes mainly from the very creditors from whom CCCS is trying to free its 651 clients.

As Dillenbeck explains it: "Roughly almost three-quarters of our income comes via the creditors. They contribute what they call a fair share, generally anywhere from 8 to 12 percent of the monies we disburse back to them. The way it works, a client goes on a debt management plan. They pay us monthly, roughly $12 for the program. We in turn redisburse it out to their creditors. If we send the creditor $100, we generally get back $8 to $10 from the creditor for working with the client."

(If that seems impossibly convoluted, consider this: In Placer County the United Auburn Indian Tribe plans to build a $100 million gambling casino and also to contribute $50,000 annually to fight compulsive gambling. In the argot of the day: Go figure!)

Because credit card companies are cutting back on their fair share payments -- "they had no idea how overextended people are," Dillenbeck explains -- Consumer Credit Counseling is looking for alternative sources of funding, including grants from nonprofit foundations.

[photo of credit cards]With just seven employees, CCCS had a payroll close to $200,000 last year, and "will probably exceed that this year," the chief executive officer admits.

Dillenbeck adds: "The goal ultimately is to keep people out of the bankruptcy arena if possible. We do see far more bankruptcies. People are just too overextended."

That, says Rosie Wentworth, is the No. 1 reason people seek help from Consumer Credit Counseling.

"It used to be," she says, "that people would come in because they had some kind of medical emergency or they'd lost their job. Now it's simply because they're spending too much money, they're not budgeting, not handling finances appropriately. It's sad, really.

"I counseled a client recently. His student loans came to $15,000-$20,000 and he had $6,000 in credit card debt. He's on a program and we're trying to figure how he can work it out.

"Credit cards in and of themselves are not evil," she adds. "It's how we choose to use them. And the reason that people misuse them as badly as they do is because of the mindset of our culture. We have to have everything we want right now. We've kind of gotten away from back in the '30s and '40s when we were taught you have to save for the things you want."

Wentworth has become involved recently in teaching classes in money management to students in Eureka High School and at Eureka's Zoe Barnum High School. She is also trying to work with a class at Arcata High School. The idea, of course, is to get to these young people before they become hooked in the revolving account of credit card debt.

"Once you're 18 years old, you can get your own credit card," she notes. "And if you go to Gottschalks at the Bayshore Mall, they have a sign up that if you're 14 years or older and your parent will co-sign for you, they will give you a credit card in your own name."

[photo of Rosie Wentworth] Rosie Wentworth, credit counselor and board member
of Consumer Credit Counseling Service

It moves her into high dudgeon: "That is outrageous! It shouldn't happen. They're pushing this to students. At Humboldt State University and College of the Redwoods at the beginning of the school year, credit card companies will go and push their product on the students coming in. This year I'm going to get a table at CR and be there myself, hopefully to counteract some of that."

Noting that retail and department stores usually charge higher interest rates, anywhere from 21 to 26 percent, than the major credit card companies, Wentworth says: "One of the things I tell my clients: You don't need all the retail credit cards. You need one major credit card, that's it ... But again there's that image. You open the wallet up and you've got three, four credit cards in there, and people, you know, they think they've arrived!"

At Eureka's CitiFinancial office -- where a sign in the window invites loan customers with the hard-to-beat offer: "We pay you for doing business with us" -- manager Bill Kerker told the Journal: "A lot of our business is to consolidate credit cards into one payment. Most every client, probably 15 a month, is credit card debt. We basically do loans for people that banks don't want to do loans for."

Interest rates are accordingly higher --18.99 percent on an unsecured basis. For people with "really bad credit," the rate goes up to 24.99 percent, but as Kerker notes, "Of course, with bad credit, there's a higher risk for our company."

In a valiant effort to get customers to "Just Say No" to credit cards, Kerker's office proffers a paper that shows it will cost you $13,538 to borrow $3,000, and take 39 years to pay it back.

Kerker acknowledges "it's pretty easy" to get hooked.

"You get credit card offers in the mail, you know, two to five times a week," he points out. "You get another credit card with a lower interest rate or an introductory rate. You grab that one and you don't realize the rate's going to go up in a few months."

A virtual native of Humboldt County who's been with CitiFinancial now for more than three years, Kerker himself owns up to having credit cards. "More than I wish we had," he says with a wry smile. "But we keep the balances down, so we're doing O.K."

He advises: "It's pretty important, once you pay them off, you've got to quit using them or pay the balance off every month. I would suspect quite a high percentage of people get right back into the same problem."

To Thomas B. Hjerpe it is more than a suspicion. Hjerpe (the name is Swedish) is a bankruptcy attorney in Eureka and also one of the seven board members at Consumer Credit Counseling Service. He offers proof positive of this all-too-human susceptibility to relapse.

"By and large, most of the people that I talk to have credit card debt," he relates. "The highest I've ever seen was about $140,000. It's possible to get a ton of credit."

(Indeed, as Kerker noted: "If you hit your total credit line and you're paying O.K., they'll just raise your limit" without your even asking, and frequently in increments of $2,000. How obliging can you get?)

[photo of Thomas Hjerpe] Thomas B. Hjerpe, bankruptcy attorney and board
member of Consumer Credit Counseling Service

Hjerpe continues: "And I've seen the strangest situations. I've seen people who have Social Security disability income of not more than $1,000 a month, husband and wife, who have available credit of $70,000. I just find it amazing that credit card companies will extend credit to people at that rate.

"I've run into people who have been using one credit card to pay off another, and using another to pay off that one, and just transferring balances for years, and slowly accumulating debt that they couldn't clearly hope to repay since they got in this cyclical problem. And they can have $40,000-$50,000 in credit card debt.

"Yet the most mystifying thing is why do credit card companies give you credit? If you have an income of $1,100 a month, why on earth would you have a $30,000 combined credit? But I see it all the time. It seems the more credit you have, the more offers you get."

Hjerpe, a slender, handsome fellow of 32, neatly attired in dress shirt, tie and slacks, came north from Topanga Canyon 15 years ago to enroll at HSU.

Flashing a bright smile, he says, "I graduated with an English degree and an art degree, which are completely useless."

So, needing to support a family (he and his wife have a 3-year-old daughter), he went to McGeorge Law School, part of the University of the Pacific, and he's been in practice for about five years. He planned to come back here into bankruptcy law because he'd noted "only about three or four people practicing it with any real enthusiasm," and it is clear from giving what he calls his presentation on bankruptcy that he is well-schooled in the subject.

"Bankruptcy," he tells you for starters, "is your federally guaranteed right to get out of debt. And you can exercise that right once every six years."

He estimates there are 25-30 bankruptcies filed every month in Humboldt and Del Norte counties. 1998 saw the highest number of bankruptcies per capita ever nationwide 1.4 million. There was a dramatic decline last year, with only a little over 300,000 filings through the third quarter of `99.

"And the northern California section had the strongest decline of any segment of the country, a 20 percent drop from 1998, which Hjerpe finds "a huge surprise, because we have such a poor economy up here."

Going along with that decline, and probably contributing to it, credit card solicitations dropped dramatically. Scrolling his computer, Hjerpe notes that in 1998, 7 percent of nearly 3.5 billion -- BILLION -- credit card solicitations sent out were accepted. In 1999 only 1 percent of 2.8 billion solicitations were accepted.

Hjerpe concludes that maybe we're getting "a little more educated." Or maybe just deeper in debt.

"In bankruptcy," Hjerpe informs, "a credit card company only has one defense to prevent you from eliminating your debt, and that's an allegation of credit card fraud." Which, surprisingly enough, is not a criminal matter, not even a misdemeanor.

"If a credit card company can prove that you incurred credit card debt with the intent of not repaying that debt, they can prevent you from discharging that debt," Hjerpe says. "But that is rather a rare situation."

He also notes, however, that the credit card companies are now "working very hard" to push new bankruptcy legislation through Congress "to make a bankruptcy quite a bit more difficult for the ordinary person. They've been putting a ton of money into it."

One proposed change is to force more debtors into Chapter 13 bankruptcy, which requires repaying a portion of debt, rather than the more lenient Chapter 7, or so-called "liquidation bankruptcy," where only unprotected assets say a yacht or airplane can be seized and sold to repay debt, but which eliminates credit card debt.

What Hjerpe obviously finds frustrating is to come on debtors who have taken a second mortgage, which can't be eliminated in bankruptcy, to pay off credit card debt. "So by getting a second mortgage," he explains, "you're taking credit card debt that you can eliminate in bankruptcy and converting it into debt that you can no longer eliminate. I would say of the people who own their own homes, probably three out of four have a second mortgage on their house, and of those more than 50 percent have used the proceeds of the second mortgage to pay off credit card debt."

No wonder there is this problem of revolving debt. And no wonder, as Hjerpe points out, the credit card companies are "extremely resistant to any proposals to restrict the way in which they give credit."

He states: "They want to make it as easy as possible for someone to get credit, but they want to make it terribly difficult for you to get rid of it if you get in over your head."

Another of Hjerpe's peeves stems from the automobile -- both the people who get in "over their head" in buying cars, and the people who talk them into the purchase.

"I have a fair number of people who have car loans for a $30,000 vehicle," he says, "and they're paying $450 a month. That would be an unusual one, but car payments of $250 to $350 a month are very common. I find that to be a lot of money. Myself, I drive an old car. I'd say nine out of 10 of the clients I have drive a newer car than I have."

He goes on to say, "I have clients all the time who tell me, `I told the dealer everything I owe, and that dealer said, "Well, you'd better not tell everything on your application form or you're not going to get this loan.'" So they end up with lies on their application form in order to get the loan. And yet it's the dealer who's encouraging them to lie. And so they get into a loan that they just can't afford, and then you've got the lender really upset with them. And that's criminal! That's a real problem."

After listening to his litany of problems and woes, it seems strange to hear Hjerpe talk enthusiastically about "what a pleasant practice" he has. And yet you realize it is meant sincerely and that he has an empathy with his clients.

"People come in with terrible problems," he tells me. "They've got bill collectors calling them day and night, and I can almost immediately help them, almost all of them. And it's very pleasant to be able to resolve people's problems."

Even if that solution is bankruptcy, because, as he notes, it's "highly unusual for a person to ever file a second bankruptcy."

He concludes: "So for most people, this is it."

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