Credit Card Debt Likely to Escalate as the Fed Raises Rates Again
Written by Mike Killian
Posted On: June 29, 2006
On May 25th, the Wall Street Journal (WSJ) published an article entitled "Loss of Balance: Credit-Card Issuers' Problem: People Are Paying Their Bills". The article began, "Although Americans are deeper in debt than ever, they are paying off bigger portions of their monthly credit-card bills." The article offers reasons why and the overall affect on the card industry.
The assertion that Americans were making a bigger dent in their card debt was quite surprising, especially considering all of the negative news to the contrary that we are normally inundated with. I asked noted consumer advocate Dr. Robert Manning to comment on the article. Dr. Manning, a professor at Rochester Institute of Technology, has appeared numerous times before the U.S. Congress and every major news broadcast advising on issues related to consumer debt and credit. He is also author of the widely acclaimed book Credit Card Nation: The Consequences of America's Addiction to Credit.
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Dr. Manning expressed grave concerns about our nation's growing addiction to credit. According to Dr. Manning,
"Immediately after the article appeared, debt jumped 4.5%. Gasoline prices and increasing interest rates [the Fed raised rates yet again today] have squeezed the consumer far more than ever before. My standard refrain is that the last 5 years have seen a stationary consumer income versus expense. The next 5 years will experience more consumers pushed into bankruptcy especially if involved with variable interest rates [almost all cards have variable rates]."
The WSJ article also offered the comment, "J.P. Morgan [Chase] has estimated they will reduce credit card profits by $500 million in the second half of 2006." Dr. Manning suggested otherwise.
"Besides gasoline prices and increased prime lending rates reducing additional consumer payments, the credit industry is offsetting potential loss through increased interest rates and fees."
The WSJ and Dr. Manning basically agreed on the factors contributing to the increased consumer payment rate. However, I suspect Dr. Manning might question the use of the term "shrewdly" below. As stated in the WSJ:
"Although consumers are using plastic for more of their daily purchases, they are giving card issuers fits by juggling their debts more shrewdly. When card holders are hit with high interest rates on one card, they routinely transfer balances to new cards at lower rates. And in recent years, as real-estate values soared and mortgage rates fell sharply, more consumers wiped out credit-card debts altogether by borrowing against their homes."
Unfortunately, as Dr. Manning adamantly proposes, any increased payment rate that results in debt reduction may be a very temporary phenomenon. Perhaps the real question to explore is will credit card usage escalate while consumer debt continues to grow. If so, I think Dr. Manning's prediction of increased bankruptcies is as realistic as the long-term historical trend of rising credit card profits.
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Mike Killian is founder of Learning Credit and Debt Management. Mike has been writing about credit and debt management issues that are of importance to consumers for over 8 years. His articles have been referenced by various members of the media, including MSNBC and The Motley Fool. Mike has also offered debt elimination seminars to businesses and community colleges for many years.
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