A surge in personal bankruptcies isn't the only consequence of America's addiction to credit. And the problems connected to irresponsible credit card use are no longer limited to those who don't pay their bills on time. Anyone can be a victim of the radioactive fallout from the credit culture: Identity theft.
According to the Federal Trade Commission, nearly 10 million people were victims of identity theft last year. America's hasty methods for disbursing consumer credit are largely to blame.
Today, consumers can walk into a Circuit City electronics store with nothing in their wallets, and walk out with a $3,000 plasma television in about 15 minutes. This is the "miracle of instant credit," described by the Federal Trade Commission's Howard Beale.
But it's also a miracle for identity thieves. Here's why: Just as consumers can drive off a car lot in an hour with a brand new $30,000 car, so can their imposters.
Consumer spending is the engine of the U.S. economy, accounting for two-thirds of all economic activity -- and the prime of that pump is the "impulse buy," a have-it-all, have-it-now mentality drummed into American consumers by the relentless marketing efforts of the credit card industry. Ads have literally convinced Americans it's OK to spend what they don't have, a notion unthinkable just a generation ago. Just put it on plastic, it will all work out, the thinking goes.
Bankruptcies not the only consequence
More than half of American consumers are caught up in this line of thinking, taking out instant loans at high credit card rates, and later succumbing to the temptation of not paying their bill in full every month. Credit Card Nation author Robert Manning calls this illogical budgetary leap a cognitive disconnect -- for many Americans, there is no longer a connection between how much money you make, and how much money you can spend. The average American household now has $8,000 in revolving credit card debt -- but in homes where the credit card bills aren't paid in full every month, the debit is about $12,000, Manning says.
But high debts and millions of personal bankruptcies aren't the only consequence of the credit culture.
Because speed is the essence of the impulse buy, U.S. retailers waste no time throwing credit at anyone browsing high-ticket items in their stores. The nation's credit bureaus advertise that they can evaluate a consumer's ability to repay such a loan in a few seconds. Imposters can get their hands on valuable plastic with as little as a Social Security number and a name.
Identity thieves understand the system well. The quicker credit is disbursed, the quicker they can steal it. So now, the miracle of instant credit is an equal opportunity nightmare.
It's about impatience
It all comes down to impatience -- both by the company, and the consumer, says Linda Foley, executive director of the Identity Theft Resource Center.
"It's the Disneyland line, 'Keep 'em moving.' People want to get in and out. When they want to pay, they don't want to stand in line," Foley said. "And for companies, the goal is to get them in and get their money. If there's fraud, they deal with it on the other side."
Untrained cashiers are now a key part of the identity theft food chain, since they are often responsible to taking credit applications. Retailers and creditors have worked hard to streamline the process, to prevent slowdowns at the checkout line. But often, that leaves cashiers as a fragile first line of defense against ID theft.
"Can they really identify what a fraudulent application looks like?" Foley said.
Manning says it's become standard practice for credit issuers to work at lightning speed while granting credit, but says the same energy isn't applied to stopping fraud.
"It's always astounding that you can apply for a credit card on the phone or online 24 hours a day, but then you try to file a fraud claim over the weekend and you'll get an answering machine," he said.
The fraud numbers game
For retailers and financial firms, it's a simple numbers game, Foley said. Fraud is merely a percentage of sales. Stricter application procedures would mean less fraud, but would also slow down the system, and some legitimate applications would be denied -- a costly error for the firms. As long as increased sales from speedy application procedures outpace the increase in fraud, instant credit is good business.
"The numbers work for them," Foley said.
Meanwhile, the costs of fraud are also spread throughout the entire credit food chain, Manning said. In many cases, small merchants end up footing the bill when a fraudulent credit card is used to pay for goods and services. And consumers end up paying higher fees as creditors recoup losses.
"The credit card industry is shifting the cost of fraud," Manning said. "And Congress is yet to author legislation that offers a serious protection for identity fraud."
Consumers want instant credit
Liz Oesterlee, a spokesperson for the National Retail Federation, says instant credit really isn't to blame -- that smart imposters armed with a full slate of personal information can fool the system, whether it granted credit in 1 minute or 10 hours.
"All you know about a person when you are issuing credit is what they say and what their credit report says," she said. "If someone can manipulate all those things...there's not a lot that can be done."
Cutting back on instant credit wouldn't serve consumers well, she said, because they like being able to buy on impulse.
"Consumers really like to take advantage of these options," she said. "There is consumer demand for it."
A freeze on credit freezes
But those consumers who have no interest in getting instant credit, who are sure they have no use for a new credit card, have few options to protect themselves -- except in Texas and California, where they can opt for a credit freeze. The freeze essentially locks a person's credit file, and prevents anyone -- including imposters -- from obtaining credit in their name.
While Louisiana and Vermont residents will also soon have this option, consumers in the rest of the country can't freeze their files. The credit industry has so far fought against legislative efforts to allow freezes, arguing they are unnecessary and will have a negative impact on the consumer spending and the overall economy. Meanwhile, freezes where they are available can be costly: In California, residents are dinged for $10 by all three credit bureaus when they sign up, and $12 each time they make an adjustment to their file.
So for most consumers, instant credit, and all its consequences, are here to stay.
"Immediacy is the enemy of accuracy," says Marty Abrams, former executive at credit bureau Experian Corp., and now an analyst with Hunton & Williams. "ID thieves are successful because we have a marketplace based on immediacy. We can't move away from instant credit but it is the enemy of good authenticity."
Bob Sullivan is author of Your Evil Twin: Behind the Identity Theft Epidemic.
This story ran on MSNBC News on Jan. 5, 2005.