Financially Stressed Consumers Use Credit To Stay Afloat
Across the nation, credit counselors are noticing an unusual trend, as reported by Kathy Chu in a recent issue of USA TODAY. Financially squeezed borrowers have opted to pay their credit card and car expenses before (and sometimes instead of) their mortgages. This trend suggests that home owners in particular have essentially given up trying to stay current with their mortgages. Economists say if the trend continues, mortgage losses could accelerate and further drag down the economy.
Mark Zandi, chief economist for Moody's Economy.com, says the ballooning of credit card debt is especially noticeable where the economy is weak. California, Florida, Arizona and Nevada are examples.
Job loss and fewer opportunities for overtime hours coupled with an increase in grocery, gas, home taxes, medical expenses and interest rates compel consumers to supplement their income with credit.
"I'm trying to pay more for everything in cash, but it's just impossible. It's not feasible right now to stop spending on the credit card," said Tomah, Wisconsin resident Christie Carlson. A single mother of five children, Carlson enrolled in a debt-management program after racking up $20,000 in card debt.
Carlson is not alone. Allen and Jennifer Lisowe are also relying on credit to pay for daily expenses. The two New Holstein, Wisconsin residents accrued about $20,000 in credit card debt in recent years. Previously, they were able to use a home equity loan to pay credit card and auto loan bills but now have little equity to tap. As home values sink, homeowners like the Lisowes' find it harder to obtain equity loans.
According to the Federal Reserve, the growing reliance on credit cards may explain why revolving debt rose last year at a seasonally adjusted annual rate of 7.8% to a record $943.5 billion compared with a 6.1% adjusted rate in 2006.
An Equifax analysis shows that 38% of delinquent mortgage borrowers kept all their credit card bills current and 62% kept all their auto loans current in the two-year period ending in July 2007. Analysts worry that it is only a matter of time before financially stressed consumers max out their credit cards and start defaulting in larger numbers.
Howard Dvorkin of Consolidated Credit Counseling Services in Fort Lauderdale, Florida summarizes the problem. "The economy has relied on the consumer to keep it afloat for the last seven years, and there's no more gas in the tank of the consumer," Dvorkin says. "They've got nothing to give."
Many asset backed securities are based on credit card receivables. A decline in credit use or an increase in credit card default will adversely affect the value of these investments.
