Monday, September 25, 2006
Credit correction could lead consumers into cash collapse
Shannon Kelems is not much different than many heads of households who would just like to get ahead and avoid financial ruin. It is not the fact that she is a single mother of two children who is holding down two jobs in suburban St. Louis just to make ends meet. Nor is it the recent string of bad luck from an emergency gallbladder removal and repeated car troubles that keeps her concerned about her future.
Kelems shares the same plight of an estimated 135 million Americans who sat down to pay their bills the first of February just to discover that minimum credit card payment rates had in many cases more than doubled with the statements delivered mid-January.
Why don't you just rip my heart out, said Kelems, who like 35 million of those card holders are barely able to meet their minimum payments anyway. If I hadn't had this string of bad luck I'd be OK, Kelems said. Now I don't know what I will do.
Although reported in broadcast and news print before the end of 2005, many consumers and even financial professionals appear shocked at the impact a change in federal regulations has caused as minimum amounts due on major credit cards shot up from 2 percent to 4 percent virtually overnight. At the same time utilities, gasoline, and basic consumer goods are revealing the influence of inflation, and signal potential catastrophe for those Americans who do not have an increase in income to match what they are charged for basic living.
On the surface, the argument made by federal financial regulars made sense. Officials noted that as U.S. consumer debt passed the level of $2.2 trillion - more than doubling the amount posted a little over a decade ago - individuals and families living on credit were digging themselves a hole out of which it would take decades to recover. The decision was to have lenders double the amount charged for minimum payments and in turn reduce the time required to pay off debt into about one third of its original timeline under the most ideal of circumstances.
Doubling a minimum amount due on the issued credit cards seems reasonable if one is able to financially handle the load. It is no problem at all for those who ideally pay off their cards at the first of every month.
The reality is that most Americans who struggle to make minimum credit card payments or even minimum payments plus covering finance charges just to stay one step ahead. Observers contend that these individuals are no longer going to be able to make the current minimums with which they are faced. The result will be additional or late charges, compounded interest, deeper debt for the middle class - even if they no longer make use of outstanding cards - and financial ruin for many families while corporate losses await card companies.
Add increased credit card bills with job cuts and boosts in the cost of living, and what might look reasonable written on paper among governmental decision makers and in corporate board rooms, quickly spells disaster on the streets.
Among the coffeehouse court of public opinion, most questioned expressed anger at the move. How can they do that? This will be disastrous for people, said a waitress in her 60s who is concerned about the futures of her children and grandchildren.
I'm so much in debt now it doesn't even matter, confessed one coffee patron.
My minimum on one MasterCard went from $400 to more than $1,000 a month, said one man under the agreement of anonymity. I could do the $400 even though it wasn't easy. But there is no way I can cover this. I don't know what I'm going to do. I might as well not even try to pay it and just live with bad credit.
Some card holders went so far as to suggest their suspicion that credit card companies are penalizing current card holders because of a rush of bankruptcies that were filed at the end of 2005, in anticipation of legal changes in bankruptcy laws for 2006.
Even financial experts in the legal profession are cautious about making any definitive statements. Bankruptcy lawyers contacted for comment suggested that questions be directed to consumer lawyers. In turn, consumer lawyers recommended that bankruptcy lawyers be sought for insight.
Some might argue that credit card companies caused their own problems with advertising that shows how easy it is to use their plastic for lavish vacation trips, sports events or concerts of the year. However, among most consumers questioned, the bulk of their credit debt during 2005 came with charges to make home repairs, keep automobiles operational and even purchase groceries just because pay checks covered little more than the mortgage and utilities.
For most credit card holders many questions remain regarding new regulations that are certain to put them into hotter financial water than they were already experiencing.
Subscribe to Posts [Atom]
