As the number of personal bankruptcies soared during the 1980s and '90s, something less obvious but more far-reaching was happening in the relationship between creditors and debtors: a dramatic shift in how Americans borrowed and spent money.
The main instrument of change was the bank credit card the Visas, MasterCards and the like, now used by two of every three American households and the easy access to credit they allowed.
Credit cards helped fuel the 1990s boom, the longest uninterrupted economic expansion on record. They sped the latest high-tech products CD players, Web-linked computers, wireless telephones into people's hands much faster than hot new inventions spread in earlier eras. They helped many people, even those near the bottom of the economic ladder, share in the sense of prosperity.
Credit cards grease the gears of the consumer economy in many ways: They spare people from having to carry much cash, work equally well in person, on the phone or over the Internet, and provide instant access to credit credit that 20 years ago would have been out of reach for many, at least without considerable effort and paperwork.
But there are researchers and consumer advocates who see a darker side to the changes that credit cards have fostered, especially as the economy slows and fears of a recession increase. For all the benefits the cards offer, they have enabled people to get so deeply into debt that they can't see a way out. Sometimes, they can't tell what hit them until it's too late.
By the end of the 1990s, credit cards had helped leave Americans deeper in the hole than ever before. Last year, bank-card debt alone totaled $531 billion, nearly double what it was five years before. And credit-card balances loom increasingly large in the profiles of those who filed personal bankruptcies, which have topped one million every year since 1996.
To Elizabeth Warren, a Harvard law professor who has studied credit issues for the last two decades, the rise in bankruptcy is the canary in the mineshaft a warning sign about risky patterns in spending and borrowing that affect millions of households beyond those who fall off the financial precipice.
The biggest changes in the last 20 years, Warren said, may be reflected in what seem like the smallest decisions people make with credit cards in their pockets or purses.
"In 1980, anyone who wanted to borrow $25,000 had to go to a bank and explain why, and had to fill out a form to explain how they were going to pay for it," Warren said.
"So a would-be debtor had to make a well-considered decision to go into debt, and have that decision reviewed by a somewhat skeptical creditor.
"Fast forward to 2001, when some people add up $25,000 in credit-card debts without a single purchase larger than $60. In other words, they went $25,000 into debt one pizza and one pair of tennis shoes at a time. And that is a profound shift in how Americans deal with money."
For those who can't handle the consequences, the woes and balances can compound quickly.
If cardholders are late with a payment or exceed their credit limit, lenders typically will tack fees of $25 to $30 onto the next month's bill. Many also are subject to so-called penalty interest rates, which quickly can boost rates to 25 percent or higher.
Rising rates, charges
Nowadays, a typical credit-card offer does not even promise a particular interest rate.
Instead, a customer's starting rate after any so-called teaser rate expires varies according to how they rank on computerized "credit scoring" models, which use a person's behavior to predict the likelihood that he or she will become delinquent or default on payments. If they miss payments, penalty fees and interest rates kick in to reflect what lenders fear is an increased risk.
Such pricing mechanisms also protect lenders from one of credit-card lending's most bedeviling peculiarities: the tendency of some borrowers to go more deeply into debt at a time when their risk of missing payments rises because of job loss, illness or some other emergency.
Jim Chessen, chief economist for the American Bankers Assn., said risk-based pricing was the fairest way to assess the cost of credit.
The majority of credit-card holders sometimes carry a balance from month to month or "revolve" their credit to spread out purchase costs.
According to the most recent Federal Reserve analyses, households that carry a balance owe, on average, more than $4,000 on about 3.5 credit cards with a median interest rate of 15 percent.