The new normal

The new normal

Up to your eyeballs in debt

By Joan Trossman Bien 10/13/2011

“Bank of America customers, vote with your feet, get the heck out of that bank. What Bank of America has done is an outrage.” This, from the Senate majority whip, Sen. Dick Durbin (D-Ill.),  in response to Bank of America’s new $5 monthly charge when customers use their debit cards for purchases. “It’s hard to believe that a bank would impose such a fee on loyal customers who simply are trying to access their own money.”

Durbin said new federal rules that reduced “swipe” fees that banks charge retailers are trying “to strike some balance in an industry that has shown little or no balance. And one of the worst offenders in this is Bank of America, the largest bank in the United States.”

The politician’s furious tirade against an institution that accepted a $45 billion taxpayer bailout only to turn around and give out $3.3 billion in employee bonuses in 2008 is understandable, if not a bit tardy.

Americans know all about rising costs coming from every direction — higher prices for housing, food and gas. They also know how quickly their own assets can lose value, mortgages that are so far underwater they may never again surface, and average real income that is now annually $5,000 less than that it was in 1999. In California, household income plunged 4.6 percent just last year, according to the California Budget Project. That was the biggest decline in one year on record.

Financial experts point to individual consumer debt as the hidden cause of our economic reality. They say unless and until consumers are able to “deleverage” their financial obligations, this anemic economy will continue to drag, taking a financial and emotional toll on American workers and their families.

The number of Americans who have fallen below the official poverty level this year has skyrocketed, according to the U.S. Census Bureau, now numbering 46.2 million. This is the third consecutive year in which the poverty rates have increased and it has been more than 50 years since so many Americans were officially living in poverty.

The last time that so many children fell beneath the poverty line was in 1962, two years before President Lyndon Johnson initiated America’s War on Poverty.

Here’s a bulletin: the Great Recession, the single worst financial period in this country’s history since the Great Depression of the 1930s, officially ended in 2009. For whom? It ended for those financial and insurance interests that initially caused the nosedive. It ended when they received their government bailouts. American workers in desperate need of help received none.

A study at Northeastern University in Boston found that 88 percent of income growth between the second quarter of 2009 and the end of 2010 went to corporate profits; 1 percent went to workers. The study said, “The only major beneficiaries of the recovery have been corporate profits and the stock market and its shareholders.”

That is why economists are saying that we will never pull ourselves out of this financial tar pit until we change how we go about the business of business. The new normal cannot hold.

The numbers really matter
Debt. You can’t live with it, you can’t live without it. If you want to buy a car or a house, you need good credit, which can be earned only by borrowing money and paying it back. Statistics show that credit card debt is diminishing. Some say that is because people are finally paying down their balances. Others say it is because lenders have been forced to write off so many accounts as uncollectible. But many individuals are whittling down their balances.

2“Men, it has been said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay, 1841
Overall, Americans have dug themselves into a very deep financial hole. According to the National Foundation of Credit Counseling (NFCC), 11 million people say they carry $10,000 or more in debt. The NFCC’s July poll found that 64 percent of Americans do not have $1,000 available in case of an emergency. In order to quickly raise the money, they say they would borrow it from friends or family or they would need to sell or pawn some belongings. A full 17 percent said they would stop paying current obligations in order to deal with the emergency.

Just a few years ago, credit card offers filled mailboxes regardless of the creditworthiness of the consumer. Steve O’Halloran is a spokesman for Chase Card Services. “Chase has issued more than 90 million credit cards,” he said.

According to the Federal Reserve, every credit card holder has been issued close to nine cards. Some 181 million Americans now hold credit cards. A full 80 percent of consumers hold a debit card.

A bad start in personal finances
Susan (not her real name) was a well-educated professional in Southern California with a postgraduate degree and a job she loved. She graduated more than 20 years ago with about $60,000 in student loans.

But Susan, now 64, had to quit her job to deal with family issues. Her student loans have ballooned to nearly $130,000 and she has no idea how she will repay them. Even worse, she is drowning in credit card debt.

What went so wrong? “I didn’t keep track of my student loans and somehow they ended up being so huge,” Susan said. “I had some student loans that I didn’t even know existed that went into default, and that’s where I got myself into trouble.”

Susan is certainly in trouble. With credit card rates that have zoomed up to nearly 30 percent, she is in despair. “Boy, it is like the biggest black cloud over me. It will haunt me the rest of my life,” she said. “They were going for my blood. It has just gotten so, so horrible.”

Banks have discovered that students are a fresh source for new customers. A 2009 study by Sallie Mae found that 84 percent of students have credit cards. Half of those students have four or more cards.

As the cost of an undergraduate degree rockets skyward, lately ratcheting up several times a year, most students have no way to pay unless they continue to take out more student loans. The goal of a degree is what is foremost on their minds, not the consequences of the burden of debt after they graduate. Students now graduate owing an average of $20,000 in student loans.

Mark Kantrowitz is an expert on educational finances and runs the popular websites FinAid.org  and Fastweb.com. He sympathizes with today’s college students and said that when the tuition raises keep coming, there are few alternatives.

“Most students do not have much tolerance for unanticipated increases in costs,” Kantrowitz said. “The colleges say they increase student aid to compensate for mid-year tuition hikes, but practically speaking, most students experience cost increases of hundreds or even thousands of dollars.”

Kantrowitz offered a few practical tips. “They can respond by cutting their costs, sell some belongings on eBay or Craigslist, work an additional part-time job, tap into savings, if they have any left, going deeper into debt, transferring to a lower-cost college, or dropping out of college,” he said.

The New York Times recently said credit card debt soon will be eclipsed by student debt, which is projected to cross the $1 trillion line this year. Moody’s found that student loan debt has grown by at least 10 percent every year for the past decade. The Chronicle of Higher Education reported in July that one out of five government student loans since 1995 has gone into default. Making loan repayment even more difficult, the deal to raise the debt ceiling included a change in the way interest on federal student loans is calculated for some types of loans. Those students will see their interest begin to accrue before they have even finished school, instead of at graduation or six months following graduation.

Student loans have their own special hell if the debtor does not make payments on time or misses one payment. If the former student defaults, the loan can be sent to a collection agency. Only a student loan obligation will survive a personal bankruptcy.  To force repayment, the government can garnish wages andwithhold tax refunds, all without a court order.

Joy Thormodsgard, chief executive officer of Surepath, formerly called Consumer Credit Counseling Service, emphasized the need for young people to appreciate the importance of having good credit. “Credit is being used to determine job opportunities, good credit can be the deciding factor for an employer,” she said. “Understanding credit and the post college cost of living, including a car payment, auto maintenance, insurance, rent, student loan payments, etc., so they may avoid financial pain caused by poor decision making.”

Kantrowitz suggested that new grads learn the details of how to live within a budget. Break down your costs into categories, keeping track of what is necessary and what is discretionary. If you have any money leftover after all bills are paid, start saving like crazy and pay down the debt with the highest interest. If you don’t have enough money each month, cut your expenses by selling your car, moving in with your parents, or cutting back on restaurants.

Bank penalties and interest
Penalty fees imposed by banks in 2009 totaled $20.5 billion and the lenders have been making record profits.

During the second quarter of 2011, Visa profits increased by a whopping 40 percent. Citibank saw its second quarter U.S. profits of $52 million last year explode to $684 million this year. JP Morgan profits climbed seven percent which totaled $5.4 billion.

In all, five of the country’s six top credit card companies saw meteoric profits in the second quarter, as the interest rates and fees continued to climb. Discover Financial’s profits tripled compared to last year. To understand this tsunami of money flowing only one way, from the consumers to the banks, you need to know that the numbers have been artificially enhanced by many banks releasing some of their capital reserves. It makes the books look even better in the short run.

Although President Barack Obama has issued new regulations on consumer banking, which have eliminated the one-sided term of required arbitration in lieu of the right of the consumer to sue in the event of a dispute, banks have not been shy about altering the basic contract unilaterally. For example, Bank of America recently notified credit card holders that it was adding an annual fee for each card. Even if you do not charge one dime on that card, you will be charged the annual fee until the account is closed. Closing a credit card account can hurt your credit.

O’Halloran from Chase said the bank is very choosy about who it will accept as credit card holders. “Chase is focused on prime and superprime customers, many of whom pay off their balances in full each month.”

Even after cherry-picking the wealthiest consumers, those who least need the credit but are most likely to get it, some of those customers run into trouble.

Chase is ready for the hard times with several programs. “We’re committed to working with customers who are experiencing serious financial difficulty,” O’Halloran said. “We understand the need for more alternatives and greater concessions to assist financially stressed customers in making credit card payments.”

O’Halloran said there are programs to help customers manage their borrowing and spending by designing a plan for payments. There is the Chase Blueprint program and the Chase Clear and Simple, both of which are promoted as educational devices.

Thormodsgard said the situation is not as simple as it claims to be when presented to consumers. “There certainly has been a substantial reduction in the percent who can benefit from the creditor concession in a debt management plan or qualify for a mortgage modification. Consumers are in deeper financial trouble and often wait too long before reaching out. We do know that getting credit is more difficult.”

A shift in consumer debt
The problem of credit card payment delinquency is getting better. According to the credit reporting agency Transunion, late payments are at the lowest rate since 1994.

There is more good news. The average debt being carried by consumers is down more than five percent since last year. And it is 16 percent lower than it was at its peak in early 2009.  Consumers have cut back on the number of credit cards they carry and, according to Transunion, they are taking on less debt.

There are, however, some reasons for the decreasing debt that are not beneficial to consumers. Banks now refuse to issue credit cards to someone with a bad credit score. And it is more difficult to run up a large balance on existing cards because banks have cut back on credit limits.

So, as consumers have become more savvy about handling their own credit and debt, the lenders have chosen to reduce the amount of money that most people can borrow.

A final word on how much the U.S. government attitude about debt has changed. Back in 2002, then Vice President Dick Cheney was certain that he knew more than former Treasury Secretary Paul O’Neill. When O’Neill tried to warn Cheney that the federal deficit, which had grown to more than $500 million at that time, was posing a threat to the economy, Cheney would have none of it.

“You know, Paul, Reagan proved deficits don’t matter,” Cheney lectured. “This is our due.”   

 

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