A new survey finds that low- and middle-income families are acquiring credit card debt to pay for essentials at the same time that business practices in the credit card industry are making this debt more costly and harder to manage.

This survey from Demos and the Center for Responsible Lending comes just five days before the new bankruptcy bill becomes effective and undermines consumers' ability to recover from heavy debt. Research shows that credit card debt in America has almost tripled since 1989 and now stands at $800 billion.

In addition, owing largely to job instability and medical costs, bankruptcies rose from 616,000 in 1989 to over 1.8 million in 2004.

"American families are facing financial hardship not experienced for generations, and we commissioned this survey to tell us precisely why they are turning to credit cards so often" says Tamara Draut, Director of the Economic Opportunity Program at Demos and co-author of the report.

"The results are clear: wages have stagnated while medical and housing costs have skyrocketed, and if confronted with a layoff or health emergency there are few, if any, personal or public safety nets adequate enough to help in a crisis. Households are turning to high-cost credit cards to keep afloat."

The bankruptcy bill was passed, in part, based on a stereotype that credit card debt results from extravagant and irresponsible use. The Demos/CRL survey contradicts that widespread belief, showing that lower-income families, by and large, are using credit cards judiciously and trying to pay them down responsibly. Among the findings in the survey:

• Seven out of 10 low- and middle-income households reported using their credit cards as a safety net relying on credit to pay for car repairs, basic living expenses, medical expenses or house repairs.

• Households that reported a recent job loss or unemployment, and those without health insurance, were almost twice as likely to use credit cards for basic living expenses.

• Households that used home equity to pay off credit card debt did not gain net benefits. Respondents who reported paying off some credit card debt by refinancing their mortgages reduced their home equity, on average, by $12,000 while retaining average credit card debt of $14,000 18% more debt than homeowners in the survey who had refinanced without paying down credit card debt.

• $8,650 is the average credit card debt of a low- and middle-income indebted household in America.

The study also reports that, as Americans are increasingly relying on credit cards to pay for essentials that wages no longer cover, reliance on credit cards is having a multiplying effect that is creating millions of "debt-stressed" families:

• 47 percent of households had been called by a bill collector.

• Almost half missed or were late with a payment in the last year, with nearly a quarter of households reporting paying a late fee at least one or two times in the past year.

• In addition to charging late fees ranging from $30 and $39, most issuers also penalize cardholders for late payments by increasing the interest rate on the account two- or three-fold, often after only one late payment. A household with the average amount of credit card debt in our survey ($8,650) would pay an additional $1,100 in costs each year if their cards interest rate was increased from the typical 12 percent to the average 25 percent default rate for one late payment.

"Americans families are losing the fight against an economy and lending practices that are working against them," said Mark Pearce, President of the Center for Responsible Lending. "Its time for Washington to address this crisis head-on and create policy that protects, and promotes economic vitality for, all American households."

The report, titled "The Plastic Safety Net: The Reality of Household Debt in America," details current business practices in the credit card industry that make it difficult for lower-income families to manage their finances and stay out of debt, including issuers' ability to change the interest rate and other terms of credit any time and for any reason, and based on transactions unrelated to the account.

The report includes recommendations for reforms that would promote economic security for families and establish fair business practices that would result in more equitable and less capricious credit terms.

Recommendations

Among the reports key policy recommendations:

• Promote increased savings, not increased debt, to help families meet unexpected financial emergencies.

• Improve wages for working families.

• Improve access to affordable health insurance for all Americans.

• Strengthen unemployment insurance coverage and benefit levels.

• Reform "penalty pricing" that saddles financially-vulnerable consumers with thousands of dollars in extra fees and interest costs.

• Require changes in credit card rates and fees to be related to the original contract and limited to future activity on the consumers account.

• Clearly disclose to consumers the long-term costs of making only minimum payments.

• Ban binding mandatory arbitration clauses that prevent consumers from pursuing complaints in a court of law.

• Require meaningful underwriting standards to ensure credit limits do not exceed a consumers ability to repay their credit card debt.

The full report is availabler at www.demos.org and www.responsiblelending.org.