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Tag: consumer debt

  • Consumer Debt Declined a Record $21.5 Billion in July

    Last November USA consumer debt fell, by a then record of $8 billion. In July, 2009, consumer debt was reduced another $21 billion, which is a good sign.

    April of 2008 USA consumer debt stood at $2.54 trillion. Based on a population of 300 million people that would mean $8,467 for every person in just personal debt. Living beyond your means is not a good thing. After the July decrease of $21.55 billion, the total consumer debt stood at $2.47 trillion, a decline of $70 billion over the last 15 months.

    Decreasing this debt level was (and is) necessary. If that means we have some suffering today to pay for living beyond our means for years the ‘fix’ is not to continue to live beyond our means. The ‘fix’ is to accept the consequences of past behavior and build a more sustainable economy now for the future.

    Consumer credit down record amount in July

    This is the sixth straight monthly drop in consumer credit — the longest consecutive string of declines in credit since the second half of 1991.

    Consumers have retrenched since the financial crisis hit in full force last September. Credit has fallen in every month except January. In percentage terms, the drop in credit is the biggest since June 1975.

    And on a year-on-year basis, credit is down 4.3%, the biggest drop since June 1944. The retrenchment was much more than expected. Economists surveyed by MarketWatch expected consumer credit to decline by $4.3 billion. There were also sharp downward revisions to June data.

    Economists said shrinking credit might strangle the recovery. “There is no real way to put a positive spin on these data. Credit is still shrinking and that is going to have an impact on consumption,” wrote Charmaine Buskas, senior economics strategist at TD Securities, in a note to clients.
    …
    credit-card debt fell $6.11 billion, or 8.5%, in July to $905.58 billion. This is the record 11th straight monthly drop in credit card debt. Non-revolving credit, such as auto loans, personal loans and student loans fell a record $15.44 billion or 11.7% to $1.57 trillion.

    Here is a positive spin on it. We owe $21.5 billion less than we did last month. How lost are we that there is no positive way to spin owing less money than you used to owe?

    Related: Personal Saving and Personal Debt in the USA – Americans are Drowning in Debt

  • Loan Delinquency Rates Increased Dramatically in the 2nd Quarter

    chart of loan default rates 1998 to 2009Chart showing loan delinquency rates for real estate, consumer and agricultural loans for 1998 to 2009 by the Curious Cat Investing Economics Blog, Creative Commons Attribution, data from the Federal Reserve.

    Delinquency rates on commercial (up another 151 basis points) and residential (93 basis points) real estate continued to increase dramatically in the second quarter. Credit card delinquency rates increased but only by 20 basis points.

    Real estate delinquency rates exploded in 2008. In the 4th quarter of 2007 residential delinquency rates were 3.02% by the 4th quarter of 2008 they were 6.34% and in the 2nd quarter of this year they were 8.84% (582 basis points above the 4th quarter of 2007). Commercial real estate delinquency rates were at 2.74% in the 4th quarter of 2007, 5.43% in the fourth quarter of 2008 and 7.91% in the 2nd quarter of 2009 (a 517 basis point increase).

    Credit card delinquency rates were much higher than real estate default rates for the last 10 years (the 4-5% range while real estate hovered above or below 2%). Now they are over 200 and 300 basis points bellow residential and commercial delinquency rates respectively. From 4.8% in the 3rd quarter 2008 to 5.66% in the 4th and 6.5% in the 1st quarter of 2009.

    The delinquency rate on other consumer loans and agricultural loan delinquency rates are up but nowhere near the amounts of real estate or credit cards.

    As I wrote recently bond yields in the last few months show a dramatic increase in investor confidence for corporate bonds.

    Data from the Federal Reserve

    Related: Loan Delinquency Rates: 1998-2009 – The Impact of Credit Scores and Jumbo Size on Mortgage Rates – 30 Year Mortgage Rate and Federal Funds Rate Chart

  • Manage Your Borrowing and Avoid Debt Negotiators

    Debt Negotiators May Give Little Relief to Consumers

    “They never told me that the money I was paying wasn’t going to my debt, it was going to them,” said Hopkins, 59, who quit work in January 2008 after a brain tumor led to surgery. He now receives $1,539 a month in disability checks. “You are better on your own.”

    Credit-card delinquencies are at record highs, according to Fitch Ratings, and the U.S. unemployment rate of 8.9 percent is the highest since 1983. As more consumers fall behind on bills, settlement companies often end up adding to the debt burden rather than offering a cost-saving solution, said Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling in Silver Spring, Maryland.
    …
    New York Attorney General Andrew Cuomo has begun a national investigation of settlement companies, and has sued two for fraud and false advertising. Illinois Attorney General Lisa Madigan has also filed two lawsuits against debt-settlement companies, alleging they “engage in deceptive marketing practices” and “do little or nothing to improve consumers’ financial standings.” Texas Attorney General Greg Abbott sued a debt settlement company in March, saying it engaged in “deceptive and misleading acts,” according to court documents.

    It is much better to avoid this problem by taking wise personal finance actions – don’t take on personal debt for minor purchases (for a mortgage then debt is fine, probably fine for a car – though avoid debt if you can). The “secret” is not very secret. Just don’t buy what you can’t pay for. It is very simple, many people just don’t want to follow that simple strategy. Also save money in an emergency fund, so when some emergency comes along you don’t go into debt. You just use your emergency fund.

    Once you are stuck in a bad situation with more debt than you can afford to pay back you have bad choices. Obviously many try to take advantage of you. Frankly they realize many that are stuck in bad financial position make bad financial decisions. Therefor it is a good place for those trying to rip people off to find people to take advantage of. The best way to deal with this is not to try and find the best debt negotiators it is to manage you finances well and not get in trouble.

    Related: Personal Saving and Personal Debt in the USA – How to Use a Credit Card Successfully – Credit Card Companies Willing to Deal Over Debt – Where to Keep Your Emergency Funds? – Americans are Drowning in Debt

  • USA Consumers Paying Down Debt

    Consumer borrowing falls in March at fastest pace in over 18 years, Americans saving more

    Consumer borrowing plunged in March at the fastest pace in 18 years as Americans put away their credit cards and hoarded cash amid the worst recession in decades. The Federal Reserve said Thursday that consumer borrowing dropped 5.2 percent in March, the biggest decline since an 8.1 percent fall in December 1990.

    In dollar terms, consumer borrowing plunged by $11.1 billion. That’s the largest dollar amount on records dating to 1943, and more than three times the $3.5 billion drop that economists expected. The borrowing category that includes credit cards dropped 6.8 percent in March after a 12.1 percent plunge in February. The category that includes auto loans fell 4.2 percent after rising by 1.2 percent in February.

    The Commerce Department last week said that the personal savings rate edged up to 4.2 percent in March, marking the first time in a decade that the savings rate has been above 4 percent for three straight months.

    Good. Consumer debt is far to large and should be paid down. This is a start but a small start, but a much larger reduction in outstanding consumer debt is needed before we have reached a healthy level of debt. The continued improvement in that debt level signifies a stronger economy. Far too many financial journalists instead of pointing out the benefits of such improvement note that this reduces current consumption (and thus, effectively, will lower current GDP – compared to what it would be if we continued to spend beyond our means). You cannot spend money your don’t have forever.

    Having more stuff in your house (along with an increased outstanding credit card balance) does not make you economically more successful. And the same holds true for the economy. Having more stuff sitting in people’s house and an increasing debt load is not the sign of a stronger economy (even if it is a route to a higher current GDP). Increased saving and reducing debt will strengthen the economy and improve our economic success over the long term.

    Related: Will Americans Actually Save and Worsen the Recession? – Proper credit card use – Personal Saving and Personal Debt in the USA – Americans are Drowning in Debt – Buying Stuff to Feel Powerful

  • The USA Economy Needs to Reduce Personal and Government Debt

    The economy has structural problems. The solution at this time is not to convince people that everything is fine and just go spend money you don’t have. Personal debt is much to high. The practices that allowed huge anti-competitive and economy endangering institutions to threaten the economy have not been addressed. Hundreds of billions of dollars have been given to those who caused the credit crisis. Making the federal debt problem even worse.

    Some suggest we need to regain consumer confidence. Unfortunately that fixes nothing. That “strategy” is just to convince people problems don’t exist and buying what you can’t afford is fine. Just convince people to go spend more money, run up their credit card debt, borrow against their house, as long as everyone believes it can continue. That can work for awhile but it then fails due to structural issues. And the solution becomes more and more difficult the longer such a strategy is used. The same way a ponzi scheme eventually implodes.

    If you could convince those in a ponzi scheme (and new investors) that they should just be optimistic it can continue. But eventually people ask for their money to buy something and none exists and the scheme fails.

    With an economy, after structural problems are addressed then you need to convince people to be less fearful and to be more optimistic. Because often by that time people have become so fearful that they are not taking even reasonable steps. They don’t buy even though they have the money in the bank and have a real need for the purchase. When this happens, convincing people that the economy is stable is important. However, cheerleading and convincing people to just continue to run up their debts to spend more is not wise when the economy is already far to in debt is not wise (though it is politically expedient).

    The USA needs to stop living beyond its means. That is the most important factor to long term economic strength. But the focus doesn’t seem to be on doing this, instead it seems to be on printing money to paper over the problems. There are many great strengths of the economy and those have allowed huge federal deficits, huge personal debt, monopolistic practices, destabilizing financial risks taking… Even with that things have been quite good. But those areas need to be addressed over the long term.

    Related: Let the Good Times Roll (using Credit) – Families Shouldn’t Finance Everyday Purchases on Credit – Living on Less

  • Credit Card Charge-offs Increase to Over 7% of Accounts

    Punctual Payers Face Higher Rates From Card Companies

    His reward for paying on time was an interest rate increase to 19 percent from 12 percent.
    …
    The average interest rate charged on credit-card balances decreased to 13.4 percent in November from 14.4 percent a year earlier, according to the Federal Reserve’s December G19 report, which tracks rates for credit-card accounts. The prime rate has decreased to 3.25 percent from 6 percent last February. Most variable credit-card rates are linked to the prime rate, which follows the federal funds rate.

    Rate changes announced by New York-based Citigroup Inc., the biggest U.S. credit-card issuer, American Express Co. and Charlotte, North Carolina-based Bank of America Corp. are intended to raise revenue, said Woolsey, who is based in Austin, Texas.

    Citigroup’s charge-off rates of loans increased by 88 percent, climbing to 7.81 percent in December from 4.16 percent a year earlier, according to data compiled by Bloomberg. Charge- offs are loans the banks don’t expect to be repaid. American Express’s charge-off rates more than doubled to 7.23 percent from 3.32 percent while Bank of America’s rates increased to 8.45 percent from 5.24 percent, a 61 percent jump.

    You can avoid worries about credit card companies increase your interest rates by taking sensible financial precautions and avoiding credit card debt.

    Related: posts on credit cards – Don’t Let the Credit Card Companies Play You for a Fool – Legislation to Address the Worst Credit Card Fee Abuse – Incredibly Bad Customer Service from Discover Card

  • Americans are Drowning in Debt

    The story is a bit boring. People spend money they don’t have. But it is hard to ignore the story when it is so important. And so many people are foolishly ruining their financial future. When credit cards put you in jeopardy

    Consumers have racked up more than $2.2 trillion in purchases and cash advances on major credit cards in just the last year. And it’s become a habit for them to spend more than they have. The overall credit card debt grew by 315 percent from 1989 to 2006, according to public policy research firm Demos. To compound the problem, fewer people are paying their credit cards bills on time.

    Please stop. Don’t spend money you don’t have. Don’t think those political “leaders” that practice the same spending money they don’t have financial management are worthy of respect and don’t follow the bad example they continue to set.

    The article gives some tips. I would suggest the tips for using your credit cards I have blogged about earlier. But the main thing is really simple: don’t use your credit card for loans – pay off your full balance every month. Save money for things you want. When you have the money saved, then buy them. This is not rocket science it is pretty darn easy. Don’t spend what you don’t have.

    Related: Too Much Stuff – Financial Illiteracy Credit Trap – Poor Customer Service from Discover Card – Trying to Keep up with the Jones – Raising Taxes on Future Generations