Credit card debt related to housing crash
Posted on February 11, 2008
Filed Under Bankruptcy, Credit Card News | Comments Off
Like many Northern Nevadans, 34-year-old Jack Zenteno and his wife, Betty, found their finances taking a severe hit from the area’s housing crisis.
“My wife went into real estate right when the market began to fall apart,” Zenteno said. “And it occurred at the same time I lost my job.”
With no savings to draw from, the Zentenos found themselves quickly racking up $30,000 worth of credit card debt — mostly to pay for daily expenses. It’s an expensive lesson that would cost the couple two years of their lives and a host of sacrifices, Zenteno said.
“Once we got around to about $20,000 in credit card debt, we knew we were in pretty big trouble,” Zenteno said. “It’s amazing how fast credit card debt can add up before you even realize it. It was just unreal.”
Extra credit
As more homeowners struggle with skyrocketing house payments, several experts expect many of them to start using their credit cards as a means to get by.
“Anybody who is having trouble servicing their mortgage is going to try using credit cards to finance those other expenditures,” said Tom Cargill, an economics professor at the University of Nevada, Reno. “I suspect you’ll find that a lot of the states that have had the most serious mortgage problems and foreclosures will also tend to have higher balances (on their residents’ credit cards).”
It’s a trend that holds true for Nevada, which has been hit especially hard by the subprime mortgage crisis. Nevadans had the second-highest average credit card balance in the nation at $7,645, according to Experian’s www.NationalScoreIndex.com site. California residents were fourth with a mean credit card balance of $7,209. Mississippi residents had the lowest mean credit card balance nationwide at $5,216.
Nationwide, the use of revolving credit — fueled largely by credit cards — kept increasing throughout 2007, according to a recent consumer credit report by the Federal Reserve. After a 5.4 percent increase in the first quarter of 2007, use of revolving credit saw an 8.8 percent jump in the third quarter. By November last year, use of revolving credit rose by 11.3 percent. In comparison, revolving credit increased by 6.1 percent in 2006 and 3.1 percent in 2005.
The rise in credit card use has led to brisk business for counselors specializing in debt reduction and financial management. Reno-based Consumer Credit Counseling Service of Northern Nevada has seen demand for its services double after the housing market started its downward spiral in 2005. The increase has been fueled by consumers struggling with credit card debt, said consumer credit counseling service manager Natalie McKinnon, who has seen people come in with as much as $100,000 in credit card debt.
“A lot of the people have been hit by higher house payments, so now they’re starting to use their cards to pay the difference in their mortgages or pay for groceries,” McKinnon said. “Unfortunately, it’s becoming a vicious cycle for them. They’re basically robbing Peter to pay Paul.”
Unearned credit
For unwary consumers, credit cards can be a double-edged sword, according to several experts. Used wisely, credit cards can be quite convenient, particularly for people who exercise discipline and pay their balances in full each month. In 2006, 40 percent of credit card users paid their balance in full every month, according to the Federal Reserve.
Once unpaid balances reach five figures and interest rates creep past 20 percent or even 30 percent, however, credit card users face an equation that can easily add up to trouble.
A $50,000 credit card debt at 24 percent interest, for example, means users will need to pay an extra $12,000 per year on top of their regular payment, Cargill said. Add extra fees and all sorts of penalties to the mix, and credit card owners can dig themselves a very deep hole. Even credit card debt that’s only in the hundreds can be a big deal for consumers with low incomes.
“This is really expensive credit, and I don’t think people realize how it can snowball,” Cargill said. “The credit card companies would love for you to carry those balances for months because the interest rate is high. It makes it easier to postpone your day of reckoning. But it also makes the day of reckoning more severe when it finally comes.”
A large part of the problem is how easy it is these days for consumers to obtain credit cards, said Mark Pingle, an economics professor at the University of Nevada, Reno. The downside to making something more easily available is that it also becomes easier for people to abuse it. In the past, people had to save to pay for the things they want and also set aside cash for emergencies, Pingle said. But the advent of credit cards changed all that. Nowhere is that more obvious than the average personal savings rate in the United States, which, after reaching a peak of $2,285 in 1984, dropped below zero with an average -$322 in 2006, Pingle said.
“People have learned to rely on their credit cards, and that’s great until there’s a downturn and you enter long-term debt,” Pingle said. “But this current problem with debt could be a blessing in disguise. It might just help retrain people to save and have a little nest egg, which is what people did before credit became readily available.”
Getting back on track
One person who plans on saving up for that nest egg is Zenteno, who has spent the last couple of years paying off that $30,000 credit card debt with his wife.
The Zentenos started off by working multiple jobs and moving to Carson City from Reno to save money on gas for their work commute. The couple also moved into a smaller apartment and cut off miscellaneous expenses such as dining out and watching movies.
“We just decided to buckle down and get rid of it as fast as we could,” Zenteno said. “It was incredibly depressing to think about carrying that much debt your whole life.”
The Zentenos expect to pay off all their credit card debt by summer this year. Others won’t be as lucky. According to a recently released Federal Reserve survey, 68.4 percent of banks expected a deterioration in credit card loan quality this year, fueled by delinquencies and charge-offs. Zenteno, on the other hand, is just happy to be free of such concerns.
“Never again,” said Zenteno, who plans to save enough money to cover six months worth of expenses after paying off their credit cards.
“We’re going to do everything we can to avoid having that much credit card debt. Once we have these bills paid off, we will never carry a balance on our credit card again.”
by Jason Hidalgo