Three Reasons Why Consumer Debt Falling Is Bad News

Sure, it sounds great...until you consider the implications. Then it's just terrifying.

I know what you're thinking right now. Considering the sheer number of financial gurus and guru-wannabes who've been screaming GET OUT OF DEBT RIGHT NOW BEFORE IT'S TOO LATE IT WILL KILL YOUR CHILDREN, how could it ever possibly be a bad thing that consumer debt is actually falling for the first time in sixty years, as I noticed whilst reading the Financial Times?

Yes, Suze Orman is probably already planning to run me over with her affordably-priced family sedan as we speak. But there are actually three reasons why this is really, really horrible news. I present them for you now.

1. De-leveraging reduces total credit in-system and therefore credit amounts. One part of how credit-worthiness is determined is based on how much credit you've had and how well you manage it, in the form of paying it off. If you've already shown that you can handle a limit of ten grand reliably, no one's really concerned about edging it up to, say, fifteen or twenty, even twenty five. But the less you use credit, the less anyone wants to give you. If your limit is five grand and you never spend more than one, don't be surprised to find your limit slashed.

2. A big chunk of that reduction isn't payoff, but write off. It's not so much that people got super responsible, tightened their belts, and set to work paying off their credit card debts, but rather that the credit card companies realized you can't get blood from the stone that is ten percent unemployment (and it's WAY more if you count all the indices--some project it's more like twenty five percent when you factor in under-employed and discouraged workers) and are thus writing off the debts.

3. A consumer economy depends on consumer purchases. It's not exactly a surprise, but for a consumer economy to get anywhere, consumers (that's us) have to, you know, buy stuff. And with household debt falling, and harder to get besides, that means consumers will buy much, much less stuff. If people buy less stuff, less stuff needs to be made.  Thus, fewer people need to be employed making stuff, which in turn leads to fewer people buying stuff, and...you see where this is going.  Maybe we'll make it up. Maybe we'll get into exports. But this is a long shot to say the least and shouldn't be counted on. 

So as good as it may sound that consumers are de-leveraging, it's actually, secretly, horrible news.

Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

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Would You Like to Set the Terms of Your Credit Card?

If you have stopped using your credit cards, would you start again if you could set the terms of your agreement?

There has been a recent trend of people getting away from using their credit cards for a variety of reasons. Many of them simply want to get out of debt. Others are freeing up some available credit in case of an emergency. Still others are afraid of the new regulations that recently went into effect because it could cost them more money in fees and charges. As a result, credit card companies are looking for ways to bring customers back.

One of the latest ideas is to allow customers to build their own credit card. Many consumers say they would start charging again if they could set their own terms. Adam Levin, an official with Credit.com, said some card companies are offering the ability to set fixed rates, variable rates, reward programs, grace periods and due dates just to entice people back to the plastic. CitiGroup is allowing customers to transfer balances from other cards to their CitiGroup account and they can pick their own interest rate.

CitiGroup is just one company that is leaving it up to the customer. American Express is testing a program in which customers can choose their benefits and rewards. They can choose discounts at their favorite restaurants, air miles and more so the customer is in more control of their rewards. Discover has also jumped into the mix by allowing some customers to choose between lower interest rates or longer term lengths.

To many analysts, this new trend may be a win-win situation. On the one hand, the credit card companies may get more of their customers back as well as some new ones due to the flexibility they are offering. As for the customers, they have more say in what they get with their credit cards and they are more likely to think about their finances more as a result. Many of the mistakes that have resulted in financial problems for millions of consumers in the last few years is that they do not take ownership of their finances. This will cause them to think about their finances more and take the time to see what is best for their lifestyle and their particular financial situation. Even some consumers have said they like the accountability of the new plan.

Regardless of the type of plan you choose with your credit card company, always be sure to read the fine print before agreeing to anything. That’s the best way to avoid unexpected charges, penalties and fees.

Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

Advertising Disclosure: This site may be compensated for hosting offers.


What is Wrong with Debt Consolidation?

What is Wrong with Debt Consolidation?

Is hiring a debt consolidation company right for you?

Many people who find themselves in credit card debt turn to debt consolidation companies to help them deal with their bills. At first, debt consolidation seems like a good idea. The service usually reduces your interest rates and you only have to make one payment each month to take care of multiple bills. Unfortunately, there are many disadvantages to using the services of a debt consolidation company that you should be aware of before making your decision.

1. If you are approved for a debt consolidation loan, your interest rate is likely going to be higher than a personal loan to pay off your bills. The fact that you are consolidating your debts shows that you have made financial mistakes in the past and you are a higher loan risk for the lender. Therefore, they are going to protect their investment by charging a higher interest rate than normal.


2. If you are hiring a company to simply pay your debts while you make one payment to the company, the service fee could actually be going to pay down your debt further rather than paying the company a service fee.


3. Most debt consolidation loans are short term. This means you may be forced to pay off your consolidation loan much sooner and with higher payments than you would if you simply kept making payments on your credit cards. This means you will pay less money in the long run because the interest will not accrue as much, but you may need to make larger payments for the term of the loan.


4. Debt consolidation is more like a bandage for the problem. More than 60 percent of the people who use a debt consolidation service quit within six months and end up with more debt than they started with. Others continue to use their credit cards because they do not change their behaviors or spending habits because their debt consolidation loan is more of a “quick fix” to their financial problems.


5. Many debt consolidation loans require you to put up collateral for the money you receive. For many people, this is difficult because they do not have the assets they need to offer as collateral. If you run into more financial difficulties, you could have your assets seized or frozen and still be responsible for some of the debt.


6. In some cases, getting a debt consolidation loan is looked upon the same way a bankruptcy is looked upon when applying for a home mortgage. This may ruin your chances of getting a good mortgage rate or getting a mortgage at all.

Debt consolidation loans may seem like a good idea at first. But when you consider the drawbacks, you may want to reconsider your options.

Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

Advertising Disclosure: This site may be compensated for hosting offers.