The Way It Looks from Here
Posted by Gail | Filed under Credit Wise, In the News
The European media is all a’buzz with the news of the U.S. “crisis”. There is much speculation about how down “down” can get, and there’s a lot of yak about the credit crisis that started it all. The pundits are gleefully rubbing their hands together as they watch the termoil because all this shifting sand gives them plenty to talk about. And some of them are saying abostively posolutely NOTHING. I watched one U.S. man-in-the-know being interviewed and no matter how many times he was asked the question about what all the bleeding would lead to, he stood pat on his non-answer: America’s financial insitutions are in great shape. Really? Great shape? So, what’s with all the “bail-out” blather?
There’s no question that the credit crisis was the straw that broke the bull’s back, but it isn’t over. One of the most interesting phenominon that I watched coming from the U.S. was the fact that defaults on home loans were happening at a much higher rate than default on credit cards. This is completely contrary to what we know about the psychology of borrowers, but nobody spent much time investigating it. I’m not sure why because it was a signal. Anyhoo, mortgage defaults were up and credit card defaults were down and that meant the credit world was still strong. Hmmm.
Turns out the only reason why revolving credit (credit cards) were looking so stable was because consumers were doing so much of their borrowing against their homes. According to an article in the International Herald Tribune last weekend, while the housing bubble was expanding, credit card debt grew (in 2004) by $6.25 billion a quarter. (Hey, that seems like a horse-poop of a lot of debt to me, but I’m a working stiff, so what do I know?) Once the housing bubble popped — so consumers needed another source of credit to fund their ever expanding lifestyles — credit cards became the choice forthose who wished to keep shopping. In the fourth quarter of 2007, credit card debt grew by $20 billion U.S.
That’s $20 BILLION in increased debt in the last three months of 2007. Holy Moley Macaroni! And the almost $1 trillion in credit card debt outstanding in the U.S. right now is all unsecured. Consumers won’t lose anything but their shiny credit scores walking away from it.
But that’s not the worst of it. No way, mama. The worst is this: What are those credit card companies going to do to protect themselves from default, and what’s it going to cost credit card users?
With a looming recession, even those people who have been very good at paying off their credit card balances every month may find themselves stretched and taking advantage of smaller payments to see them through the rough. But if credit card companies tighten the money supply, increase their fees, and bring into effect penalties laying hidden in cardholder agreements, even the most credit-worthy customers could find themselves paying through the teeth.
Congress is worried. It’s taking a hard look at just what credit card companies have been up to in an attempt to mitigate the pain cardholders end up feeling. Since they’re the same guys that let the pot boil over, I’m not holding my breath.
So what’s a poor plebe to do?
First, if you’re carrying a balance on your credit card(s), you should be working really hard right now to move that balance to the lowest cost credit you can find — think line of credit or conolidation loan — with the goal of having your consumer debt paid off in three years or less.
Second, if you’re a Canadian using a U.S. credit card, get rid of it. Get a Canadian card (we have different rules in Canada, and we don’t let our lenders get away with quite as much… though we have been pushing the boundries of good sense too.) Regardless of what country you’re in, make sure you read your cardholder agreement and if you don’t like what you see, get yourself a credit card with terms that are more reasonable. Yes, there are such things.
Third: STOP SPENDING MORE MONEY THAN YOU MAKE.
Once upon a time there was no credit. If we wanted a new chair, we had to save up the money before we went shopping. And if we saw a really nice chair that was 50% more expensive, we had to decide if we were prepared to wait another six months to save up the difference or go with the plainer more affordable chair. We had choices, and we chose. We didn’t think we could HAVE IT ALL RIGHT NOW!
It’s time to re-embrace the idea of spending only the money we have earned… not the money we MAY earn in the future. Now’s the time to take charge — pardon the pun.
We are going to be witness to a lot of pain in the coming months. People are going to lose their jobs. People are going to lose their homes. People are going to get sad, angry, frightened. Anything we can do to put ourselves in a better space to weather the storm is worth doing.
Remember all the fuss that was made as we approached the year 2000 and everyone ran out and stocked up on food and water because the computers were all going to crash? Dumb. This is waay, waaay, waaaay more serious. It’s time to hunker down and get real.
Playtime in the House of Cards is over honey-bunnies. Now comes the serious business of paying the piper.
March 18, 2008 at 10:55 am
Gail,
Interesting read. I have a question though. Many of the big banks in Canada invest heavily in US institutions. Huge losses across the border means that there will be effects felt here. Do you forsee Cdn big institutions increasing their bank fees and interest rates to cover the losses it took during the sub-prime debaucle? If so, should we be moving our money to credit unions or other financial institutions that do not invest heavily in the US markets?
March 18, 2008 at 2:48 pm
I remember a time when a person felt insulted when someone asked if they wanted to put a purchase on a credit card. “I have the money to pay this, I don’t need a credit card!”
Another change: house as a financial investment instead of a home. Some individuals seem to think it’s ok to give up paying their mortgage since the house is worth less than when the bought it! They signed a contract but it does not seem to mean anything to them even though they can afford the payments.
March 18, 2008 at 6:55 pm
I have goosebumps! What a terrifying read.
I hope everyone takes this cautionary tale to heart and works fast on it!
March 18, 2008 at 8:34 pm
At one of the big 5 banks I am working for, Gail, I know a few people who have already lost their jobs. We also talked about the possibility of letting go some of the call centre staffs. So, Elvin, they might not increase their bank fees dramatically but the services might suffer.
March 19, 2008 at 8:14 am
Thanks Angela, but let’s be honest..what services does the big 5 offer anyways.