By Karl B. Hille and Kelsi Loos
Special to Capital News Service
GAITHERSBURG - It wasn't bad investments or even an emergency
that pushed Dennis and Stephanie Bradshaw close to a credit default.
It was simply having a baby.
When the Bradshaws brought their second son home to
Gaithersburg in July 2010, $4,000 of the $10,000 hospital bill was not
covered by his insurance. The family set up monthly payments with the
hospital and soon began using credit cards to cover other expenses.
"Obviously, I was charging for diapers, which was a huge
expense," Dennis Bradshaw said.
The family kept charging food, gas, rent and other necessities
until April 2011, when Dennis Bradshaw was paying more than $1,000 a
month on five different cards at interests rates of 6 to 17.1 percent.
They cut back on expenses -- Target brand instead of Pampers
and bag lunches instead of McDonalds -- but it wasn't enough.
To make ends meet, Stephanie Bradshaw asked her grandmother for
help, and she gave them a cash gift. Dennis Bradshaw's mother also
helped out with a series of cash gifts. His tax return went straight
to the credit cards too.
He said he should be able to pay off his Bank of America card
soon. But without a bare-bones budget and the generosity of relatives,
the Bradshaws could easily have fallen into a cycle of default that
has ensnared many.
Basic costs like housing, day care, transportation and medical
needs rose twice as fast as wages in Maryland over the past decade.
Many families have used credit cards to bridge the gap -- even at the
expense of paying the mortgage.
Unable or reluctant to seek government financial assistance,
families are turning to credit as their safety net, state officials
and advocacy groups say. As a credit card becomes more crucial to
getting by, credit-card debt is taking the place of mortgage payments
as a top priority for repayment.
"Credit cards are no longer being used for just discretionary
purposes. People need their credit cards to buy gas, to function and
go to work," said Mark Kaufman, commissioner of the Maryland Division
of Financial Regulation.
The credit card has become such a survival tool, and mortgages
have become such a losing investment for a broad portion of
homeowners, that plastic has achieved new importance and priority in
people's day-to-day lives, Kaufman said.
"Usually you pay your mortgage debt at the expense of their
consumer debt. Now people are paying their credit card before they pay
their mortgage," Kaufman said. "As home values deteriorate, you have
less incentive to keep paying on that."
Credit-reporting agency TransUnion has numbers that support
that picture. Last year, Maryland ranked near the high end of mortgage
delinquency -- with more than 7 percent of loans in default by the end
of 2011's fourth quarter. On the other hand, the agency reported that
credit-card defaults fell even while credit-card debt continued to
rise, leading some to conjecture that people are more careful to pay
down their debt as the card becomes more important to getting by.
The Federal Reserve Bank of New York Consumer Credit Panel
reported in 2010 that people may use their credit accounts to "smooth
their consumption" in the event of a job loss, leading to more
Marylanders racked up some of the highest rates of credit-card
debt per capita, according to a 2008 study by the Corporation for
Enterprise Development, a nonprofit think tank.
The average Maryland borrower owed $13,145 on credit cards at
the end of 2011, including retail cards and other lines of credit.
About 5 percent of borrowers were 90 days or more past due on their
payments, according to the study.
Government assistance programs could help some to bridge the
gap between wages and costs, but many working families make too much
to qualify. The state saw a 43 percent increase in people seeking help
from its Temporary Cash Assistance program between 2008 and 2012, but
two-thirds were turned away as ineligible.
Others may be uncomfortable asking for help, state officials
say. Instead they charge the difference between their salary and their
"People are embarrassed. The last thing in their comfort zone
is going to their neighbor and asking, 'How do you get public
assistance?'" said Ian Patrick Hines, the communication director for
Maryland's Department of Human Resources.
Robin McKinney, director of the Maryland CASH Campaign, an
organization that promotes financial stability for low-income
families, said her clients have become much more likely to charge
medical bills as they lose insurance coverage at work, lose their
jobs, or start their own businesses.
"We see a lot of credit card debt that's really medical debt.
People need credit and they need it now. When an emergency happens...
they don't have enough money they have to pay for it," said McKinney.
Borrowers without insurance will pay their bills on credit,
then suffer the effects of stress caused by dealing with those debts.
"It's the spiral effect," said Sarah Johnson, director of the
Baltimore CASH campaign.
Dennis Bradshaw had insurance through his account managing job
at a high-volume printing company, but coverage was cut back through
that plan because of rising health-care costs, he said.
While he could rely on family and save his way out of debt,
people with long term-medical conditions or disabilities can't always
work their way out of medical debt, as the expenses keep piling on.
A 2008 survey of low and middle-income households by the Access
Project, a Boston-based nonprofit that aims to improve health-care
access, found that half of medically indebted families used credit
cards to pay for basic living expenses in the past year because they
did not have enough money in their savings. Only one in five people
without medical debt did so.
Families with medical debt owed an average of $2,194 on credit
related to medical expenses.
Consumer advocates warn that this tendency to rely on credit
for basic needs could lead to late payments or defaults, subjecting
the borrower to higher interest and more fees.
"The bottom line is that time is of the essence if a person is
facing mounting debt," McKinney said.
Jason Flanagan, of Greenbelt, learned that lesson the hard way.
He began depending heavily on his credit cards in 2005 and 2006. The
plastic helped him catch up from week to week as he juggled multiple
jobs, college classes and a growing family with one young daughter and
a second on the way.
"We'd use it to pay a bill, or -- I was going to school at the
time -- I'd use it for school stuff," said Flanagan, 31. "We never
used it for cruises or fancy vacations or big screen TVs. We just used
it to pay bills."
Flanagan said he defaulted on two credit cards before he could
finish his degree, and the financial pressure was part of the reason
for his divorce.
His credit history limits Flanagan's options. He cannot buy a
home or move to a bigger apartment to accommodate his two daughters
when they come to visit every other weekend.
Learning to get by without credit has forced some financial
discipline on him. Yet despite his credit card history, he said he
still gets offers in the mail. Not as many as before the recession,
the offers he does get are for subprime credit cards -- those with
interest rates around 24 percent.
More than half of Marylanders have taken such offers, said the
CASH Campaign's McKinney. With high interest rates, it becomes harder
and harder to pay down debt and mounting fees.
"Creditors aren't going to go away. Interest and fees will
accrue. Collection activity will worsen and often times people find
themselves in a deep hole very quickly," said Deanna Booker of the
Consumer Credit Counseling Service, a financial education nonprofit
group. "The idea is to start working on digging out of the hole as
quickly as possible."