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Consumer debt takes toll (News Article).

Postby Spazmogen on Tue Jul 04, 2006 10:04 pm

I remember reading in January that Americans (as a whole) had a negative savings rate. They tend to spend more than they make, in some cases they even used their savings. Today this was in my local paper...I predict a record number of bankruptcies in the next 2 years.

Are we in for another 1929 type senario where people just up and walk away from their debts?


Consumer debt takes toll
By EILEEN ALT POWELL, AP

NEW YORK -- Rising interest rates and higher gasoline prices are putting the squeeze on U.S. consumers' budgets. Many are finding it harder to keep up with their bills.

Credit counselling agencies say consumers are coming in in droves seeking help.

"My phones are going crazy," said Howard Dvorkin, president of the non-profit Consolidated Credit Counseling Services Inc. in Fort Lauderdale, Fla.

"Consumers are carrying an exorbitant amount of debt -- and they don't have any savings to fall back on if things don't go right."

An important measure of consumer financial distress, late payments on credit cards, rose in the first quarter, says the American Bankers Association. The trade group, based in Washington, D.C., said the percentage of bank cards 30 or more days past due rose to 4.4 per cent in the January-March quarter from 4.27 per cent in the final quarter of 2006.

The Federal Reserve's decision last week to raise short-term interest rates for the 17th consecutive time will boost yet again borrowing costs for consumers, likely prompting more delinquencies on credit card bills -- as well as on auto loans and mortgages.

The slowing economy also is depressing income growth, so a greater percentage of take-home pay is going toward necessities and less is left over for debt payment.

Among the consumers who recently put a call into Dvorkin's counseling centre was Andreia Marshall, an assistant project manager for a builder in Delray Beach, Fla.

Marshall said that after she broke up with her boyfriend, her paycheque wasn't big enough to cover her apartment rent, higher gasoline prices and other day-to-day expenses. Soon she started falling behind on her credit card bills.

"It got to the point where the credit card companies were calling," she said.

"It's overwhelming. You feel as if you're drowning and you feel bad about yourself."

With help from a credit counsellor, Marshall is working out a budget and whittling down her $13,000 in card debt, which she figures could take 3 1/2 years.

"I have to think about everything I spend," she said.

"Sometimes in the grocery, I have to say to myself, 'Do you really need to buy this?'

Marshall said that instead of feeling deprived, she's feeling good about it.

"I'm proud about what I'm doing. I'm paying that debt and getting educated and I know I won't make the same mistake again."

Catherine Williams, a credit expert with Money Management International, a Houston-based financial counselling and education agency, said rising costs for gasoline and utilities were only part of the explanation for rising credit card delinquencies and increased consumer financial stress.

"People refinanced (their mortgages) six months or a year ago, so the 'house bank' is empty," Williams said. "Most can't go back and tap their home equity again."

In addition, she said, consumers can juggle debt payments only for a while. As she put it: "You let the car payment go one month, then the house payment. Then you make a lot of little creditors happy for one month, maybe for two months. Then it becomes obvious that you have to catch up on car payments and everything else slides."

Williams called it "a dangerous strategy" because consumers who let accounts go delinquent risk harming their credit ratings.

A poor credit rating makes it more difficult for consumers to get loans and can force them to pay higher rates on the loans they do get.

Consolidated Credit's Dvorkin said millions of Americans rushed to declare bankruptcy before a law change last fall made it harder for them to discharge unsecured debts.

The high level of bankruptcy filings temporarily depressed the delinquency statistics and other measures of consumer financial distress, he said.

"Now we're seeing a new crop of people starting to get into trouble," he said. "They can't keep up. They're the ones most affected by increased gas prices and higher rates."

He said juggling payments is one of the "leading indicators" that a consumer is in trouble. He added that other telltale signs are:

- You make only minimum payments month after month.

- You're taking cash advances on one credit card to make the minimum payments on others.

- You delay -- or are late with -- important payments, such as the monthly mortgage.

- You put off necessary activities, such as doctors' appointments.
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Postby LoneWolf on Wed Jul 05, 2006 11:18 am

It astounds me --the lack of fiscal responsibility, that is.

I've had moments where I haven't totally lived within my means in the past (one credit card bill I could never quite pay off, but always paid on time). But I've always made sure I had the money to pay the rent, car payment, utilities, every month. Never needed debt relief. Made sure I only ever had one credit card with a modest maximum limit so I couldn't get in more trouble than I could handle (that was back when I was single).

Today that credit card is paid off in full at the end of every month. Between the both of us, my wife and I have sky-high credit scores. We bought a house within our means (probably slightly below, since I knew the value would be reassessed, upping our property taxes and thus our mortgage payment) and a car that made sense, and our tax returns go straight back into paying down the mortgage principle. Those are our only loans; for the rest, if we can't pay for it within that 30-day credit card window, we don't buy it. I have so much difficulty seeing how people can want more than they can afford badly enough that they're willing to take the risk of bankruptcy, having all those nice things repo-ed, ruining their credit scores, having their wages garnished, all because those material possessions (or being seen having them by others) are that important.

I'm not rich, I'll never be; and some wants of mine will probably always remain wants. But at least I'll never have a hole so deep I can't climb out of it, and I'm thankful for that.
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Postby Ian on Wed Jul 05, 2006 11:30 am

I know a lot of people like that. They gotta have the big car, the boat, the plasma, etc. The end result is that they're in debt up to their eye balls. Maybe I was raised differently, but I'd rather save up my money first and then buy my toys.
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Postby dolphinius_rex on Wed Jul 05, 2006 12:16 pm

Hrm.... my idea of being in massive debt is when I can't pay off my credit card 100% by the end of the month (it's a $1500 limit only). Currently my card is more or less maxed, and I need to keep things tight so I can make faster headway on it, but my bills and rent are always paid, and I usually pay a LOT more then the minimum on my card (I NEVER have just paid the minimum!).
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Postby Spazmogen on Thu Jul 06, 2006 6:50 pm

I think we all know of someone in that debt boat.

It's time that our high schools start teaching money management starting in grade 9, and keep it up until graduation.

Personally, I believe the wife and I are doing ok. We watch our spending all of the time.

We bought the house 5 years ago. Since then I've had a $20,000/year raise in income and she's had about $11,000. We've doubled the mortgage payments, keep the visa & amex under control. We also have a government imposed work pension plan that sucks 16% of the total household income off the top. (we're civil servants, we have no choice but to be in the pension). Plus I max out my Registered Retirement Savings Plan (RRSP) (ie: IRA?).

The big one for nearly everyone is vehicle payments...

We just finished off 4 years at $725CDN a month for a Chevy Venture van. That really hurt. We will never buy new again, even with our incomes.

On my last visit to Florida, I saw people living in squalor conditions (trailers without screens in the windows) but they had a really nice SUV in the laneway. I sure they had smokes and booze too.

I can only imagine how many people are like that in North America.

Geez.

My van is 5 years old.
My car is 10 years old.
My home stereo: I bought it in 1983. Yes, 1983. I was in grade 10.
My computer is 5 years old. P3 1ghz.
My tv is a 27" Hitachi I bought in 1994.

I think it will all break at the same time. Its Murphy's Law.
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Postby Alektron on Thu Jul 06, 2006 8:44 pm

Once in a while, I take advantage of a zero interest introductory period for a new credit card if there's a somewhat pricey item that my family needs. For example, we recently got a bed ($1150), a new set of tires ($850), and a new refridgerator, W&D ($3K+). We bought a new home recently, and we have two mortgages on it, and we also just bought a new car. So, we are in debt up to our eyeballs, you might say. However, other than those zero interest credit cards, we pay off the cards completely each month, and we also have decent investments. So, the interest that we are paying is part of a strategy.

This brings up an important point. Now that the US Federal Reserve interest rates are continuing to rise, it makes less sense to pay off low interest loans rather than invest it in a high yield savings account. For example, Paypal is paying 4.92%, which is better than our car loan rate (4.79%), so it makes little sense to pay off the car loan early. In my case, I would put the money toward a higher interest rate loan first. But I can see how for a lot of people, it does make sense to keep debt if the money that would pay it off gets higher returns in investments. Unfortunately, many of those people don't have investments to speak of, so the debt situation is still very real.
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Postby aviationwiz on Fri Jul 07, 2006 6:18 am

Spazmogen wrote:It's time that our high schools start teaching money management starting in grade 9, and keep it up until graduation.


While I can't speak for other high schools, mine has a Personal Financial Management class which you can take at any time (grades 9-12), however it's not a required class, just an elective.

I took it freshmen year, and a lot of it was common sense, and stuff I already knew, but a good chunk was also good new information. It covered things like credit cards, taxes, investments, proper record-keeping, etc.

Personally, I try not to spend anything I won't be able to pay off when the bill is due. Sometimes I've cut it close, but so far I've always been able to pay off my credit card bill in full each month, which I'll have had for a year this August, but I'd been using my parent's card online a lot before then and always kept up with that too. One strategy of mine is to make the minimum payment ($10 for me) as soon as the bill is generated and available for online viewing, that way, if anything whatsoever happens during the course of that month that prohibits me from making any further payments, I've at least paid my minimum, so that it won't ding my credit rating

I try and make mostly wise purchases which I keep getting better at, but hey, I'm a kid, so there are some fairly useless purchases I make!

Oh, and Alektron, a PM will be off your way in a few minutes.
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Postby LoneWolf on Fri Jul 07, 2006 11:45 am

Alektron wrote:This brings up an important point. Now that the US Federal Reserve interest rates are continuing to rise, it makes less sense to pay off low interest loans rather than invest it in a high yield savings account. For example, Paypal is paying 4.92%, which is better than our car loan rate (4.79%), so it makes little sense to pay off the car loan early. In my case, I would put the money toward a higher interest rate loan first. But I can see how for a lot of people, it does make sense to keep debt if the money that would pay it off gets higher returns in investments. Unfortunately, many of those people don't have investments to speak of, so the debt situation is still very real.


One issue: PayPal is not a bank, and they are not insured by the FDIC. If your funds are not insured, and something happens and they fold, you get nothing.

I'm all for high-yield accounts; you just might want to make sure there isn't a better-guarranteed one from somewhere else (i.e., Wachovia, SunTrust, or some other major bank) or if you can afford to keep your money in longer, a CD with your local bank. I plan at some point to put some of our spare money in a CD, and every time it matures, just reinvest the original plus interest again and let it keep growing.

P.S. I can remember when as a kid, my standard savings account at the credit union had a 5.25" interest rate. Times sure have changed...
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Postby Alektron on Fri Jul 07, 2006 8:12 pm

It's not FDIC insured, but the risk level for the Paypal money market is still rather low. I wouldn't put all my money in it, of course.

There's also a good return from ING Direct, at 4.35% right now. It is FDIC-insured.

I forgot to mention in my last post that even if a person gets a slightly higher interest rate for a savings or money market account (ie. 4.92%) than a car loan rate (ie. 4.79%), the estimated tax should be subtracted from the projected interest earned to better understand the merit of saving versus paying off the loan. A person with a low or no tax liability would likely benefit from putting the money into the higher savings rate instead of paying off the car loan. There are other variables to consider also, such as how much in immediate savings should be available in case a major bill pops up.
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Postby MediumRare on Sat Jul 08, 2006 1:12 am

LoneWolf wrote:P.S. I can remember when as a kid, my standard savings account at the credit union had a 5.25" interest rate.

You've been hanging around computers too much- the 3.5" and 5.25" drives are infecting your thinking. [-X Did you mean 5.25% interest?

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Postby LoneWolf on Mon Jul 10, 2006 10:56 am

MediumRare wrote:
LoneWolf wrote:P.S. I can remember when as a kid, my standard savings account at the credit union had a 5.25" interest rate.

You've been hanging around computers too much- the 3.5" and 5.25" drives are infecting your thinking. [-X Did you mean 5.25% interest?

G


Yes, just fat-fingered it. Probably not "too much" as "too long", the first system I bought with my own money was a 386SX/25, first one I built entirely myself was a 386DX/20. I played around on a ton of other systems (Commodore, TRS-80, Apple II, IBM PC-XT) before that.

EDIT: Wait, I owned a used Packard Bell 8086 10MHz Turbo-XT for three months before I got the 386SX/25, I should probably count that as my first DOS education. ;)
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