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Consumers' Economic State a Mixed Bag

By Martin H. Bosworth
ConsumerAffairs.com

July 5, 2006

Crunch Time • Consumers' Economic State a Mixed Bag • Christmas Carol 2005: Crunch Time for the Middle Class • Beware the Pitfalls of Creative Mortgages • New Bankruptcy Law Tightens Rules, Adds Paperwork • Higher Minimum Credit Card Payments Add to Consumer Queasiness • Gas Prices Bottoming Out? • Consumers Face Sharply Higher Heating Costs

The double play of rising interest rates on loans and higher prices is conspiring to put consumers in worse financial straits than any time in the recent past, and several reports paint a contradictory picture as to what may come next.

The American Bankers' Association released a report stating that late payments on credit card bills increased in the first quarter of 2006, after a slump in 2005. The ABA claimed the increase in delinquency was due to higher gas prices taking a bigger chunk out of debtors' pocketbooks.

According to the ABA's statistics, composite levels of loan delinquency reported both decreases and increases. While personal loan delinquencies and home equity loans dropped, levels of delinquency on auto loans, home improvement loans, and home equity lines of credit rose noticeably.

Gas prices have registered some small decreases, but the national average remains at $2.84 a gallon, with markets such as Hawaii and Washington, D.C. seeing prices at well over $3.20 a gallon.

The ABA report also singled out the Federal Reserve for its recent series of increases to the Federal funds interest rate. The Federal rate is considered the "prime" rate that lenders use as a benchmark to set their own interest rates.

The Fed voted unanimously to raise the funds rate to 5.25 percent on June 29th, while claiming that further increases might not be necessary to contain inflation. Mortgage rates jumped to 6.78 percent in response, the highest level since May 2002.

The Federal Reserve issued a report in June on the correlations between creditors issuing solicitations for cards and levels of consumer debt.

The report claimed that although "the percentage of families holding credit cards issued by banks has risen from about 16 percent in 1970 to about 71 percent in 2004, the household debt service burden has increased only modestly in recent years."

The report also noted that credit card solicitors generally do not make offers of new credit to people they do not deem capable of handling the risk of new debt.

The Federal Reserve report was commissioned as part of the new "Bankruptcy Reform and Consumer Protection Act," the infamous legislation passed by a lobbyist-driven Congress in 2005 which makes dissolving consumer debt via bankruptcy much more difficult, and was resoundly criticized as favoring lenders and the financial industry over borrowers.

By contrast, a report from the Synovate market research firm found that the lending industry sent out over six billion solicitations for new credit in 2005, an increase of 16 percent over 2004.

As CardRatings.com reporter Rebecca Lindsey put it, "ten years ago a scant 2.7 billion solicitations were sent out."

Government-authorized increases in mandatory minimum payments on credit card bills have contributed to recent decreases in overall consumer debt, and the rising interest rates are jogging cardholders to pay down or close out their credit balances as fast as possible.

To ensure they continue to receive big paydays, lenders are going all-out to target vulnerable financial markets, such as the elderly and college students. A 2005 Nellie Mae report indicated that 25 percent of current college students had cards with balances of $3000 or more.

Student loans have also increased on average from 5 percent to over 7 percent as of July 1st. The common Stafford loan will cost collegians anywhere from $2,222 to $2,674 more in payments, making students even more vulnerable to defaulting on credit card or utility payments.

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