The Pitfalls Of Easy Credit

Luther Gatling keeps thousands of them in his office — cut up credit cards.

"These are credit cards that people have used and got themselves over extended. And so when they come in what we do is have 'em cut up the credit cards. And say it's time now to take a reality check."

That's what happened to Gilliam Bagot, a home health care worker. She came to Gatling's "Budget & Credit Counseling Service" after running up $16,000 in credit card bills.

Asked how many cards she had, she said, "Eight. They send you a card and you're pre-approved. You feel good. You have a card. You can shop. Right?"

She's not alone.

"I don't think the high consumer debt loads will undermine the recovery. But I do think it will be a significant weight to any recovery we do have," said economist Mark Zandi.

Because shoppers weighted down by debt spend less money. And, says Zandi, it's Americans below the median income who are in the most trouble.

"For those households. Their balance sheets have probably never been in worse shape."

Among households earning less than $50,000, more than one fifth are using 40 percent of their income just to pay off their loans.

Asked if he is expecting that to have an effect on the economy, Gatling said, "Yes, I sure do. It's going to have an effect. First, you're gonna see a great deal more of defaults. Because people just can't make it."

Easy credit may have softened this recession, but now higher debt could weaken a recovery.

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