Wednesday, September 05, 2007

A Loan of Randomness

By now, everyone has read or heard about the subprime mortgage crisis and its effect on the markets. Even those with the meanest of logic skills can figure out that it will affect our -- if not the global -- economy. Reports of doom and gloom abound. Yet one industry is seeing a bright side to the crisis. This industry is hopping right up to serve those debtors who are awash in debt and need to make payments on their mortgages or lose their homes. This magnanimous industry is none other than Credit Card Companies.

Visa, MasterCard, and American Express want you to know that the best way to get out your current debt crisis is to, well, go further into debt.

If you haven't been all that good at making payments on your debts, be they student loans or your phone bill, your credit report shows you to be a subprime customer, meaning that there's a higher risk that you won't be all that good at paying off any new debt you may accrue. Logic then dictates that those companies offering credit cards would avoid offering debtors like you an opportunity to owe them money. Logic doesn't seem to be Visa and MasterCard's strong point, especially given the factoids that nation-wide 1 in 5 mortgages are over 60 days in arrears -- that's 20% -- and 1 in 20 homes are now in foreclosure. Hardly a market for extending more debt; yet, compared to last year, the number of credit card offers mail directly to subprime loan holders rose 41%. At the same time, folks with good credit ratings saw 13% fewer offers.

Business analysts of all stripes agree on at least one thing: We Americans are far too dependent on debt, to the point our personal deficit rivals the government's. A Federal Reserve survey on consumer finances showed that 43% of families are spending more than they are earning each month. For those who like to see hard numbers, that means for every $100 dollars in the paycheck, the average American spends $122.

Wait, that's average and anyone worth their weight in methodology homework grades ought to know that there are three different ways of measuring "average". Here, the average given is the mean, rather than the median or the mode. What this should say is that there is some good news in the world of debt, and there is: A quarter of American households do not have credit cards; 40% of credit card bills are paid off each month and only 3% are past due by 30+ days. Only 8.3% of credit card holders owe more than $9,000. The median debt on credit cards is actually only about $2,200, which in itself is mean figure. Gender seems to play a role as to how much debt one carries: Males have an average of $2,369; females average $2,289. Or perhaps it is one's marital status: Married people have an average of $2,625 of credit card debt while non-married individuals have an average of $1,744. Then again, it could be region: People in the West are further into debt than any other region, at $2,547; people in the Midwest are the most frugal with an average of only $1,972 in credit card debt.

On the other hand, the news isn't all good. The total American consumer debt in 2004 was $1.9773 trillion, which was up 41% from 1998. It's very easy to see how we consumers went so far into debt when one looks at the figures:

The number of cards in the average wallet: 7.6 -- 2.7 bank credit cards, 3.8 retailer cards and 1.1 debit cards.

Those 7.6 cards are used to make 24% of our everyday purchases.

Most of the purchases using credit cards are considered survivor debt, charges to pay the bills. The old joke "Using Visa to pay MasterCard" isn't funny anymore.

Roughly $125 billion of American household expenses are put on credit cards. That number goes up each year.

The minimum monthly payment is now 4% of the balance, and that only went up because the government Office of the Comptroller of the Currency pressured credit card companies to raise it. Even with the new minimum, a debt of $8,000, at 18% interest will take roughly 25 years to pay off and the total bill will be $24,000 -- 300% of the original debt.

Consumer spending amounts to about two-thirds of the U.S. economy, thus the reason why the Bush administration said, after 9/11, it was our patriotic duty to go shopping.

Car loans make up 63% of the consumer debt, and if we don't by cars, Detroit will have to fire folks on the assembly line.

The job growth rate -- the rate at which jobs are added to the economy -- has been the slowest since 2003 and that means fewer people are able to get better jobs with higher wages to pay down their debt.

Wages are going down for folks with a B.A. degree, yet student loan debt is going up: in 2004 -- and we can safely say these figures have gone up since then -- 60% of students graduating from a public university had an average loan debt of $17,600. Last year, the interest rate on a Stafford loan went up 1.5%. PLUS loans are expected to increase 2.4 points to 8.5% by the time most of my students graduate and start paying off their loans. Private loans could rise to at least 12 percent. With tuition/education fees rising faster than inflation, student loans will be an even greater burden on an already cash strapped society.

The average American socks away in a savings account about 1.3% of their disposable income. To save adequately for emergencies and future expenses such as retirement, it is recommended that people save at least 10% of their income.

In 1999, the first year the IRS allowed taxpayers to use credit cards to pay their income tax, 53,300 people put their taxes on plastic. By 2003, that number rose to 313,000 people. Oftentimes, people complain about how much the government "steals" from them; yet, they seem to not care that their credit card companies are financially raping them for the privilege of using plastic to pay the tax bill.

By the way, that near two trillion dollar consumer debt doesn't include mortgages. While consumer debt averages out to be $18,654, the national average mortgage debt is $69,227 -- $102,264 if you live in the West -- thus the average household, factoring in a mortgage, two student loans, and at least one credit card, owes roughly $112,000.

The whole subprime loan crisis has become a political issue in the campaign season. Questions of what to do about it are being raised. Some want the government to step in and save debtors from the evil loan companies who sold them loans that they clearly couldn't afford.

Let's think about this for a moment. You're offered an interest-only loan that clearly will result in larger payments down the line when payments on the principle kick in and you can only afford the interest payments now; that's a sure signal that you should not sign up for the loan, no matter how hot the housing market is. A house is not an investment that can be bought and sold like an NYSE offering; it is a place to live and grow.

My answer to the folks who cry that we must protect them, that they were taken advantaged of by the loan sharks in Brookes Brothers suits, is that they knew what they were getting into and do not deserve my taxmoney to assist them out of debt. When one million homeowners are carrying more than three mortgages and 1.8 million have loans totaling more than 100% of the value of their homes, it's clear that those people aren't willing to learn to live within their financial limitations. If we allow the government to bail them out, the lesson that will be learnt is this: make stupid decisions, go far into debt, ruin the economy, but don't worry, the piper will be paid by those of us who did not.

On the other hand, MasterCard is making you an offer you can't refuse. After all, Keith Leggett, senior economist at the American Bankers Association, tell us "Consumers should be grateful that we have a very competitive market."

1 comment:

Nate said...

It's disturbing when I gain insight on the spending habits of my peers and elders. I believe this fits into a general trend toward excess in our country. I'm hesitant to blame the bankers for offering loans, however the way accounts are managed between an affluent and poor customer are vastly different. I can safely say that a majority of revenue these banks achieve are from poorer customers.