I love the Internet. You never know what you'll find there. As I was poking around it the other day, looking for something interesting to write about, I stumbled upon the 2001 testimony of Robert Manning to the U.S. Senate's Judiciary Committee, regarding consumer bankruptcy. Manning is the author of Credit Card Nation: The Consequences of America's Addiction to Credit, a well-regarded book that I regretfully haven't read yet. Perfect, I thought -- here's a chance to hear much of his message, in a smaller package.

Here are some eye-opening statements he offered:

• "Today, three out of five U.S. households are responsible for the approximately $560 billion in outstanding credit card debt. Among these 'revolvers,' credit card debt averages over $11,000 per household."
  
  
• "Most Americans would be surprised to learn that total consumer debt, including home mortgages (over $6.5 trillion), exceeds the cumulative U.S. national debt ($5.7) trillion. And, like the sharp increase in federal borrowing that augmented the modest growth of federal revenues over the last 20 years consumers have become increasingly dependent on unsecured or 'revolving' credit to compensate for stagnant real wages, increasing employment disruptions, and higher costs for big ticket items such as automobiles, college tuition, insurance, housing, and health/medical costs. Although the finance charges on the national debt have grown substantially (from $292.5 billion in 1993 to $362.0 billion in 2000), accounting for over 12% of the current federal budget, heavily indebted consumers are facing a more serious financial burden since their loans are more likely to be in the form of higher interest credit cards (average of over 18% APR) versus more modest Treasury bonds (5%-6%)."
  
  
• " the recent decade of economic growth and falling unemployment has featured a perplexing phenomenon: personal bankruptcy rates in the late 1990s (peaking at 1.4 million in 1998) soared to nearly ten times the rate of the Great Depression."
  
  
• Manning cites "the dramatic decline in the U.S. personal savings rate (from nearly 8.5% in the early 1980s to less than zero today)" as well as "a huge increase in unsecured credit card debt: from $292 billion in 1992 to $654 billion at the end of 2000. A remarkable trend since credit card debt was only $50 billion in 1980."

Consolidation and higher prices
How did things get this way? Part of the explanation lies in some historical notes Manning offered:

"The last decade has witnessed a dramatic consolidation of credit card issuers. In 1977, the top 50 banks accounted for about half of all U.S. credit card accounts. The impressive revenues of most credit card portfolios has precipitated massive mergers and acquisitions over the last decade. For instance, Banc One's [since acquired by J. P. Morgan Chase (NYSE: JPM)] acquisition of credit card giant First USA in 1997 was followed by Citibank's (NYSE: C) purchase of AT&T's (NYSE: T) credit card subsidiary -- the eighth largest in 1998. Today, the top ten card issuers control over three-fourths of the credit card market . Not surprisingly, competition for clients is less likely to be expressed in the form of lower prices. Indeed, it is striking that the average cost of consumer credit card debt has actually risen over the last five years."

This is a sharp reminder of how sometimes our best interests as investors can conflict with our best interests as consumers.

Another recent historical change regarding credit cards that Manning points out involves how we use them: What was once seen mainly as a convenience is now seen by too many as a financing tool. Before, you might charge what you knew you could pay. Today, people often simply charge what they want and worry about paying it off later. Big mistake.

The second tier
Manning notes: " the most economically disadvantaged or financially indebted [consumers] are increasingly relegated to the 'second tier' of the financial services industry (pawnshops, rent-to-own stores, 'payday' lenders) where interest rates typically range from 10 to 40% -- and more -- PER MONTH! Significantly, this fastest growing segment of the financial services industry features the participation of some of the largest 'first-tier' banks such as Wells Fargo (NYSE: WFC), Goleta National Bank, and Bank of America (NYSE: BAC)."

"For instance, Wells Fargo formed a joint venture with Cash America (NYSE: PWN) (largest U.S. pawnshop company) in 1997 to develop a state-of-the-art system of automated, payday loan kiosks. Overall, credit card interest charges, penalty fees, and second-tier finance costs could total over $140 billion in 2001."

He goes on to criticize the "first-tier" banks for cutting jobs and wages and hiking prices for consumers while profiting off of the many Americans who've become pinched by credit card debt. [Here's an interesting recent Take on Cash America, by Tom Taulli. Meanwhile, Seth Jayson wrote about his interest in another pawnshop company, First Cash Financial Services (Nasdaq: FCFS).]

College students taken advantage of
Manning bemoans the targeting of college students by credit card marketers and details the experience of Jeff, a college student who ended his collegiate career some $60,000 in debt, about half of which was credit card debt on 16 cards. Ouch.

If you've got any kids preparing to go to college within a few years, perhaps point them to our Teens and Their Money nook, or give them a copy of our Motley Fool Investment Guide for Teens book. Either can get your kid off on the right foot financially and may help them resist the lure of plastic.

My take-aways
Here are some of my thoughts after reading Dr. Manning's words:

He pointed out that while mortgage-related interest expenses are tax-deductible, credit-card-related interest payments are not. This makes me wonder what the world might look like if credit card interest were indeed deductible. For a family paying $2,000 per year in interest (as some really do!), it might mean a savings of $500 or more -- which might even be used to pay down debt. But perhaps this would delude people into thinking credit card debt is somehow OK. It's not -- even if you saved $500, you'd have paid perhaps $1,500 for nothing. Maybe the status quo is better -- those who are building equity in the world via home ownership are rewarded with tax-deductible interest, while those who are generally living beyond their means are not.

It feels callous, on my part, to cite those living with credit card debt as people living beyond their means. It's not even true, for many people -- I realize that. Sometimes unavoidable expenses just come up (perhaps a medical emergency) and the only available way to pay may be with plastic. Still, such situations can (and should) be avoided by a little planning. Create an emergency account -- we'll show you how in our Savings Center, which also features some special interest rates for Fools.

And as important as a savings and emergency plan is simply not permitting yourself to live beyond your means. If you can't afford to pay for that large-screen plasma TV with cash right now, perhaps you shouldn't be buying it right now. Do so and you may keep paying for it for many years.

It's not easy to live below your means -- but it's critical to do so, so that you can save money for a comfortable retirement. (Our Rule Your Retirement newsletter offers some great advice -- try it for free.) You'll find some support and good ideas on our Living Below Your Means discussion board.

Finally, a last question that Manning raises addresses responsibility: Should we be blaming the credit card industries and the companies in it for our current sorry state of affairs? Or are the ultimate culprits the consumers in debt? To me, it seems like both camps share some blame. What do you think? Share your thoughts on our Consumer Credit / Credit Cards discussion board.

Here are a few interesting articles on the credit card industry -- educate yourself, consumers!

• Credit Tete-a-Tete
• Stupid Credit Tricks
• Should You Drive Your Teen Into Debit?
• Beware of Canceling Credit Cards
• Dad's Six-Figure Debt

Meanwhile, if you or anyone you care about is struggling with credit card debt, head to our Credit Center, which features tips on getting out of debt, along with guidance on how to manage your credit effectively. (We even offer a spiffy Motley Fool Visa card.)

This story ran on Motley Fool on September 30, 2004.