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12/14/2003

Heavy burden

By Pam Mellskog
The Daily Times-Call

LONGMONT — Though filled with cut-up credit cards, the large glass jar sitting on Bill Foster’s conference table seems more like a bubble gum machine.

It begs the question: “Just exactly how many of them are within the glass?”

Since Foster is a counselor with Consumer Credit Counseling Service of Northern Colorado and Southeast Wyoming, the multi-colored plastic slivers must seem an innumerable mess of lives splintered by consumer debt.

“For a lot of people, I think there’s a black hole,” he said. “Money goes into areas they don’t realize it’s going.”

Though he only addresses personal financial troubles, Foster admitted that a highly symbiotic relationship exits between personal and business finances, especially for sole proprietors.

For them, consumer debt — particularly high-interest, unsecured credit card debt — might as well be cancer on small business dreams, according to Mark Martinez, executive vice president at Heritage Bank’s Louisville headquarters.

“Banks don’t view the person separately from the business,” he said. “So, when you’re looking at credit-worthiness of a business, one of the principle indications is the personal credit worthiness of the owner.”

Debt-to-income ratios represent just one tool used by commercial bankers to evaluate the risk a potential borrower presents to the lender, Martinez continued.

In general, he said, a 40 percent debt-to-income ratio still falls within the realm of acceptable risk — especially if the applicant has collateral.

However, if that ratio starts nudging upwards of 55 percent, the would-be borrower stands on slippier financial footing — no matter what kind of access they have to easily liquidated assets such as stocks, bonds, savings and even real estate, he explained.

“When I start looking at 55 or 60 percent, I have to be honest with myself and say, ‘This is pinching their lifestyle, and when it comes to buying groceries or making a loan payment, they’re going to buy groceries,” Martinez explained.

Winning a business loan is already a tougher deal to swing than securing a consumer loan, he said. So, the hopeful small business person who boldly carries big consumer debt to the lending table should brace for rejection.

That may explain the nationwide surge in small business credit card loans, according to a recent Small Business Administration report.

However, using high-interest credit cards for start-up capital makes no sense to Gerald V. Harris, a counselor with SBA’s Service Corps of Retired Executives in Denver.

“I don’t go into their personal lives,” he said. “But I have had clients voluntarily tell me that high consumer debt has forced them into personal bankruptcy, and with that you can kiss your business ideas good-bye.”

For those already personally strapped, using credit cards to launch a business seems foolhardy, he said.

“I have found that personal debt is often acquired by promiscuous spending on the latest television set, the latest car — a sort of keeping up with the Jones’s,” Harris continued. “They don’t realize that it straps them into an electric chair of living.”

That reality is all the more tragic with recent college graduates, Martinez said.

“So many of them get overburdened by debt before they even start playing the game,” he explained. “Some 22-year-olds think their only solution is to file bankruptcy. They don’t fully realize how that affects their ability to buy a car or a house or start a small business for the next five to 10 years.”

Part of the consumer debt plague stems from spending beyond one’s means via credit cards.

But some filing Chapter 7 personal bankruptcy used plastic to buy necessities after a job loss or to resolve an insurmountable avalanche of medical bills, according to Carol Peterson, owner/operator of We the People of Boulder County Colorado Inc., a national franchise in Boulder that processes personal bankruptcies.

“Sometimes the (consumer debt) pileup is just a run of bad luck,” she said.

Still, because owning a small business is already a chancy gamble — more than 75 percent of start-ups fail in the first year, according to Martinez — most financial advisors recommend mopping up debt before diving into more.

Early discipline can make the difference between getting off to the best start — albeit delayed — versus compounding a consumer debt problem with doomed-from-the-start business debt, according to John Cody, president and CEO of the Longmont Area Economic Council.

“I always advise being conservative when it comes to money,” he said. “When you’re poor, you can’t explain it to anybody. But it sure feels bad.”

And bad feelings surrounding credit card-related consumer debt is associated with poorer health, according to a 2000 groundbreaking study conducted by Paul J. Lavrakas, director of Ohio State University’s Center for Survey Research and Patricia Drentea, his former colleague, now an assistant professor of sociology at the University of Alabama at Birmingham.

In her master’s thesis titled, “For Richer, For Poorer: In Debt Do Us Part?,” Michelle Mason, now a University of Nebraska Medical Center program director in Omaha, concluded that consumer debt deteriorates marital quality as well.

To clean up debt, Martinez recommended consolidating debt and making payments on time. He also advised closing credit cards with a zero balance.

“ A lot of people don’t know it, but all that available credit card credit can work against them,” he said.

Foster said the scissors exercise seems to be a powerful symbol of the first step out.

“It’s a really scary step, but many people enjoy cutting up those cards,” he said. “It’s a relief you can see cross over their faces.”

CCCSNC offers a sliding fee scale. To make an appointment at the Longmont office, call 800-424-2227 or visit www.cccsnc.org.

Pam Mellskog can be reached at 303-776-2244, Ext. 224, or by e-mail at pmellskog@times-call.com.