You may have noticed that credit cards cost more. Higher interest rates – as high as 29 percent – higher minimum payments and new fees, coupled with credit limit reductions, have closed small businesses and added heartburn to already stressed consumers. What’s going on here?
The American consumer was the driving wheel of the economy for the last three decades. Fueled by rising real estate prices, lower taxes and the tech boom, jobs were plentiful, credit was available at record low rates and relaxed terms and the livin’ was easy.
Not anymore. According to the Federal Reserve’s “flow of funds” report for Q4 2008, household debt as a percent of household assets continued to spike upward as household assets continued to decline in value. This is the “wealth effect” in reverse. Stocks, bonds, homes, retirement accounts, etc., dropped in value while accumulated debt piled up. Unemployment neared double digits. The American consumer is taking a breather.
The average American household is carrying $10,000 in unpaid credit card debt. At the end of 2008, 5.6 percent of credit card accounts were at least 30 days late, the highest delinquency rate since 1991. This year’s projections are worse. Credit card delinquencies showed a 1.2 percent increase in January alone.
In all, consumers were carrying $2.564 trillion in total debt in January, a record amount, and up from the previous record the month before of $2.563 trillion – a debt increase caused by delinquencies rather than an increase in consumer purchases
To combat rising defaults as the economy worsens, banks and consumer card issuers have raised interest rates, lowered credit limits, imposed fees and increased minimum payments – without much notice to consumers. These actions, say the experts, are understandable but will make the situation worse, as even more consumers get squeezed between falling income and asset value and rising costs of credit card balances.
Responding to consumer complaints, the Feds have stepped in with new rules to “protect” consumers. Interest rates cannot be raised on balances owed unless a payment is more than 30 days late. “Double cycle” billing is banned, and payments will be applied to higher rate balances first to reduce interest penalties and fees. “Universal defaults” are banned, preventing credit card issuers from raising the interest rate on one account if payment is late on another account. Bills must be easier to read and any changes to accounts set forth in bold print or listed separately.
But, these new rules do not take effect until July 1, 2010, so credit card issuers are now scrambling to further lower credit limits and increase interest rates and fees in a new round of tightening to beat the deadline for the new federal regulations. The federal government “help” has made things worse for consumers for the next 16 months.
However, federal government help to banks, funded by new government borrowing and backed up by the same consumer/taxpayer, is immediate.
In addition to the more well-known Troubled Assets Relief Program, or TARP, bank bailout, the Federal Reserve has a program for the banks, effective now, called Term Asset-Backed Securities Loan Facility, or TARF. The TARF allows banks to sell bonds (backed by Uncle Sam) payable from credit card payments, thus allowing the banks to expand the supply of available money for more credit.
But is the availability of more money for more borrowing the solution or the problem?
Overburdened with debt, faced with higher interest rates, new fees and lower credit limits, are John and Jane Q. Consumer looking to borrow more?
While the Obama administration spends its time, energy, political capital and taxpayer debt to subsidize failing banks, the consumer/taxpayer is pushed to the wall. Is this the “change” you can believe in?
