Consumers slashed their credit card debt levels by nearly $1,700 per household in 2009, according to the Federal Reserve, and experts say a down economy will continue to leave borrowers with a distaste for debt.
2009: THE YEAR OF SHEDDING
CREDIT CARD DEBT
Americans spent 2009 eliminating credit card debt. At the end of 2008, Americans held $957.3 billion in credit card debt. At the end of 2009, that number fell to $866 billion — a total decrease in debt of more than $91 billion. The graph below tracks consumers’ shedding of debt in 2009.Note: Dollar totals shown in billions.
According to the Fed’s monthly G.19 consumer credit report released Friday, credit card balances fell sharply again in December. Americans shed $8.5 billion in debt, marking a record 15th straight month of decline. The report considers various types of consumer debt, including revolving credit — a loan category comprised almost entirely of credit card debt — as well as nonrevolving debt, which includes such debt as auto loans, student loans and loans for mobile homes, boats and trailers. Overall, revolving debt fell to $866 billion from a revised total of $874.5 billion in November.
Americans’ credit card debt stood at $975.2 billion in September 2008. The 15 monthly declines since then have seen U.S. cardholders eliminate $109.2 billion in credit card debt. That means the average U.S. household with credit card debt — of which there are roughly 54 million, according to government data — has eliminated roughly $2,022 in credit card debt during that period.
In 2009 alone, Americans shed $91.3 billion in debt — $1,691 per household with credit card debt. Experts say those lower debt levels stem from consumers’ reaction to the ongoing economic slump.
“People are doing a combination of things — they’re saving, they’re paying down debt and they’re not shopping,” says Dennis Moroney, research director with advisory services firm TowerGroup.
Shoppers shy away from credit, increase savings Taken as a whole, consumer debt fell by less than 1 percent to $2.46 trillion in December — a record 11th straight monthly drop, dating back to February.
Even a solid Christmas shopping season wasn’t enough to fully offset consumers’ distaste for debt. Data from the U.S. Commerce Department showed that total retail sales fell 0.3 percent in December following November’s 1.8 percent increase. At the same time, consumers are putting money aside, with the personal savings rate — a percentage of disposable personal income — increasing to 4.8 percent in December. “The savings rate continues to go up, so consumers continue to squirrel away,” Moroney says.
Meanwhile, a fourth-quarter earnings announcement from MasterCard showed that U.S. credit card use fell 13 percent from the year before, as MasterCard branded debit card use climbed 10.5 percent. “People have been utilizing credit, obviously, to a much less extent,” MasterCard Chief Financial Officer Martina Hund-Mejean told the Associated Press.
Fear encourages frugality But why? Experts say the recent economic challenges have resulted in a sort of “scared straight” program for borrowers. “People are realizing that they can only spend money that they have,” says Lauren Weber, author of “In Cheap We Trust.”
CONSUMER CREDIT BALANCES
KEEP FALLING FAST
In December, Americans’ credit card debt fell by more than 11 percent, continuing recent trends. The chart below shows the percentage change in credit card debt since the fourth quarter of 2008 — including a 13 percent drop in the final three months of 2009.
According to Weber, a look back at U.S. history shows periods alternately characterized by widespread spending and saving. “For the vast majority of Americans, frugality is the result of necessity rather than choice. I think that’s what we’re seeing now,” she says, pointing to the lack of choice consumers have about whether or not they lose access to credit — or jobs.
Weber says cycles of thrift are often the result of fear. In the current environment, it’s tough to find a scarier boogeyman than the threat of unemployment. According to the latest government data, although the U.S. unemployment rate unexpectedly fell to 9.7 percent in January, employers nevertheless cut an additional 20,000 net jobs over the month.
Looking ahead After slashing so much debt in 2009, experts say cardholders will continue to avoid using plastic — for a time. “I suspect the G.19 number will continue to deteriorate as consumers pay down debt,” says Moroney. “We don’t see that getting better into late 2011.”
Of course, whether consumers continue to save their money and pay down debt largely depends on how the economy behaves over the coming months. January data showed consumer confidence reached the highest level in more than a year, and experts say sustained improvement in the labor market could result in a rebound in spending. Additionally, as large appliances like dishwashers inevitably break, consumers will again turn to credit. “There is this pent-up demand. Eventually people will have to start buying stuff,” Moroney says. “You can’t use debit cards for big purchases, you have to finance stuff.”
If you’ve been living in a house of cards, read carefully. Just three weeks from now — on Feb. 22 — the Credit Card Accountability Responsibility and Disclosure Act (CARD Act) of 2009 goes into effect. Beware. Along with some new protections, the rules allow for more subtle and costly traps for unwary cardholders.
Americans have nearly $900 billion charged on their credit cards. More than half of those cardholders are paying only the minimum monthly payment. If you’re one of them, you’ve likely been hit with higher interest rates and lower credit limits in the last few months, in advance of the tougher restrictions.
New protections
The CARD Act requires that the card company mail your bill 21 days before it is due, up from the current 14-day requirement. And it requires those under age 21 to have an adult co-signer who will take responsibility for unpaid balances.
You’ll see one of the new benefits when you open your bill. Now the card issuer will be required to show you, in graphic format, the difference between making only the minimum monthly payment vs. paying more than the minimum each month — a dramatic reminder of the costs of carrying a balance.
The new law does not cap interest rates, but it does limit the ability of the card issuer to raise your rates. The new rules say they can’t hike your rate on existing balances unless you’re 60 days late with your payment. But they can raise rates on future purchases at any time, and without giving a reason, although they must give you a 45-day warning.
Card issuers have plenty of other ways to make money off you if you’re hooked on credit. That’s why it’s so important to read the fine print on any notice the card issuer sends you. Those costly changes may come in a separate mailing, which you might toss away as a pitch for a new card, or as a “statement stuffer” — little sheets of paper in your bill that you routinely throw away when you open it.
Costly tricks
Here’s one trick that card issuers are using to get around the rules: The prohibition against raising rates applies only to fixed-rate cards. That’s why many card issuers are now sending notices announcing that your card is now a variable-rate card — with a rate tied to the prime rate, plus 7 or 8 percentage points. Currently, the prime rate is a low 3.25 percent. But watch out if rates start to rise again.
There are other ways the card issuers can trap you. For instance, there’s no law against creating new penalties and fees on existing cards. That’s why so many issuers have started to charge an annual fee. Some even charge an extra fee to receive a paper statement. Or a fee if your card remains inactive.
And here’s the real kicker. There are no restrictions to prevent the card issuer from lowering your credit limit. That impacts your credit report because it looks like you’re maxed out! And it makes it easier to inadvertently go over your credit limit, triggering a penalty! Be sure to “opt-out,” telling the card issuer to deny a transaction if it would trigger an over-limit fee.
Terry’s tip for credit card debt
There’s really only one way to avoid all of these traps: Pay down your credit-card balance faster, using this strategy:
If you take the current minimum monthly payment, double it, and keep paying that same amount every month without charging another penny, your card will be paid off in less than three years.
That formula applies no matter how large your balance, or how high the interest rate. In fact, now you’ll see the benefits of that strategy explained on your credit card bill, which must show you the amount you must pay monthly to eliminate your balance in three years.
In these days of financial hardship, it may be impossible for many people to make larger payments. But short of winning the lottery, it’s the fastest way out of credit card debt.
Don’t fall for those debt-settlement companies. Most require you to divert your current payments to an account giving them the leverage to negotiate. Meanwhile your credit is further ruined, and they take their fees before negotiating any settlement.
If you’re really over your head in credit card debt, call Consumer Credit Counseling Services at (800) 388-2227. That will connect you to the nearest local office, where you can receive reliable advice either in person or over the telephone.
You can pay down your debt, but it takes discipline and income to do it. You can also take all the guess work out of it by using the MMA program And that’s The Savage Truth! BY TERRY SAVAGE Sun-Times Columnist
The Federal Housing Administration is temporarily delaying the effective date of its new policy to shield appraisers from loan officer and mortgage broker pressure until Feb. 15. The new policy would put FHA in synch with Fannie Mae and Freddie Mac and prohibit commission-based staff and brokers from selecting appraisers. FHA officials initially set a Jan. 1 effective date.
But they concluded FHA lenders need more time to change to their systems and decided to give them 45 more days, according to sources. Back in September, FHA officials outlined a number of risk management initiatives, including the new appraisal policy. “FHA does not require the use of appraisal management companies or other third party providers, but it does require lenders take responsibility to assure appraiser independence,” FHA officials said.
Getting a loan modification is no easy task, especially if you go it alone. Banks, swamped with borrowers seeking help, are overwhelmed and understaffed. Homeowners complain of their files getting lost, months and months of waiting, and flat-out rejection, even when they have followed all the rules.
For those who are patient and diligent, the quest for a loan modification can be a highly rewarding endeavor. Loan payments can be reduced by hundreds of dollars each month, truly making them affordable and enabling owners to hold on to their homes.
Below are some tips to help get you started:
Q:Can I get a loan modification if I don’t have a job?
A: Yes. Borrowers who have lost their jobs may still be eligible for help. They need to demonstrate they have some kind of ability to make their payments, be it with savings or unemployment benefits. Maisah Williams, financial literacy coordinator with the Human Services Coalition in Miami-Dade, said lenders will consider the circumstances of your job loss and what the chances are you will be reemployed soon. They may offer you a forebearance plan, in which all or a portion of your monthly
payment is temporarily postponed.
Q: How are most loan modifications structured and how low can my payments go?
A: Payment reductions range from between 20 to 30 percent. Under the federal government’s Making Home Affordable program, a lender will first reduce the interest rate on your loan to no less than 2 percent, then, if necessary, extend the loan term by up to 40 years to bring the monthly payments down to 38 percent of pre-tax income. The Treasury matches, dollar for dollar, further reductions until the payment is no more than 31 percent of your income. The new interest rate is fixed for five years. Then, it ticks up by one percent annually until it reaches the rate on the day your loan was modified.
Q:Do I need to hire someone to help me through the process?
A: No. It is possible to go it alone, but modification counselors warn the process can be time-consuming and complex. Karel Reyes, creator of StepByStepLoanModificationDVD.com, said there is no need for cash-strapped borrowers to pay thousands of dollars to an attorney or private firm, if they learn about the process and are willing to spend the time and effort it requires. Avi Shenkar, president of GMA Modification in Miami Beach, however, said professionals know banks’ inner workings. They ensure an application is moving quickly. He also said a pro may have greater success getting fees and penalties waived. Others said professionals know how to present applications to increase the chance of approval.
If you decide to hire a private company, make sure you check it out. Steer clear of firms that guarantee success or ask for hefty upfront fees.
Q:How do I get the process started?
A: Call your bank and ask for the loss mitigation department. Usually the representative will conduct a screening and ask you about your situation. If you meet basic eligibility criteria, the lender will send you an application package.
Q:What kind of information will I need to provide to the bank?
A: W-2s from your employer, a pay stub, and information about your savings and investments. You’ll be asked to document your debts and expenses. Don’t forget things like the birth of a baby or car insurance. Reyes said borrowers forget the small things that add up. Don’t forget to include all your income, such as rent collected from a roommate or child support. Document as best you can your loss of income or the impact of a divorce. If you owe more on your home than it’s worth, Reyes suggests sending in comparable sales info from your neighborhood. You’ll have to write a letter explaining why you need help. The more detail, the better, Reyes said.
Q:I’m seriously underwater. Will the bank reduce the principal balance of my loan?
A: Probably not. Lenders sometimes make principal reductions, but they are not common. A sharp interest rate reduction, though, will reduce the total amount you owe. Remember, too, that even though the bank lenders won’t reduce the principal, they may allow you to short-sell. That means you can sell the home for less than you owe them. It’s another way to avoid foreclosure.
Q:Does the bank charge a fee?
A: Banks may charge a negligible administrative fee. Other fees and late payment penalties can be waived, if you ask for it.
Q: My house is already scheduled for a foreclosure auction. Is it too late for me?
A: No. Lenders can cancel the foreclosure sale up to the very day of the auction. If you contact your bank at a very late stage in the foreclosure process, make sure the lender cancels the sale. There have been instances where homes have been sold at auction or taken back by the banks even though the home owner is being considered for a modification.
Q:How long does the process take?
A: About three to five months, though it depends on the bank. Some are more responsive than others.
Q:How do you get your application to the top of the pile?
A: Repeated follow-up calls are key. Roy Oppenheim, a foreclosure defense attorney in Weston, said you should call the bank as much as they called you when you fell behind.
Q:What happens to the payments I don’t make while I wait for my modification to be approved?
A: The missed payments are typically folded back into the balance of the loan.
Q:What if I have a second mortgage or a home equity credit line?
A: Under the Home Affordable plan, second mortgages are automatically modified with the first.
Q:Will the lender expect me to spend my savings or tap retirement accounts before approving me?
A: No. IRAs, 401(k)s, life insurance policies and annuities are off limits. Lenders cannot consider them. Oppenheim says lenders can and may consider cash you have in the bank, stocks held in your name or other real estate. If you have too much of that stuff, you could be disqualified. Mainly, though, lenders are interested in your income.
Q:If I overstate my expenses or understate my income, will the lender be more inclined to approve me?
A: Modification counselors say borrowers often undermine their efforts by making themselves appear worse off. If you are too needy, lenders won’t approve you, Shenkar said. Lenders want people who can pay the loan once it has been restructured, or they want to foreclose and quickly resell it to recover their losses.
Q:I’m current on my payments. Can I still get my loan modified?
A: Yes, but it’s tough. Under the federal Making Home Affordable plan, lenders are encouraged to modify loans before borrowers fall behind, but that is not widely practiced. Banks want homeowners to, at least, take a hit to their credit score to avoid the moral hazard of everyone asking for a modification, it is thought. Banks say they must deal with borrowers in danger of losing their homes first. Borrowers who are current should be at risk of falling behind in the very near future.
Q:I can’t cover my mortgage with the rent from an investment property I own. Is there any help available for me?
A: Yes. You won’t get help from the federal government’s modification plan, but most banks have other programs that will consider loan modifications for investment properties. Oppenheim said he frequently handles loan modifications for investors.
This year, Americans spent less and used less credit on “Black Friday,” a sign that consumers are moving in the right direction to avoid over-spending at the holidays.
According to the National Retail Federation (NRF), more shoppers hit the stores this year than last year, but they spent less per person. Overall U.S. consumer spending is predicted to drop this year, but if you are a shopper who is used to putting holiday expenses on credit cards, this year–more than ever–may be the time to think twice before charging.
Here’s six ways to avoid holiday debt:
1. Budget. Know what you have to spend, and don’t go beyond your means. This season, retailers are slashing prices. That can help shoppers stick to their budgets. If you are unsure what to buy, search online for gifts under $20 to get some ideas. More shoppers might also be turning to eBay and other discounters to extend their dollars.
2. Spend with cash. Cash is a growing trend: Just 28.3% of U.S. shoppers expect to use credit cards this holiday season, down from 31.5% last year, according to a survey released in November 2009 by the NRF and BIGresearch. In contrast, 25% of shoppers will use cash. These trends held true over Thanksgiving weekend, when 26% of shoppers used credit cards, 39% used cash, and the remainder reported using debit cards.
3. Do not buy for yourself. Stick strictly to your gift list. The only exception should be a great buy on an item you have planned to purchase, and for which you have dedicated cash in hand.
4. Resist store cards. Although they might offer introductory 0% interest rates, those rates will expire–and sooner than you expect. Many store cards carry regular interest rates of 20% or more. Additionally, your credit score may take a slight hit from opening a new card.
5. Read the fine print. Review all materials from your credit card issuer. Up to 50% of Americans say their credit card interest rates have increased in the past six months. Many lenders are raising rates before the Credit CARD Act’s reforms take effect in February 2010.
6. If you do use a credit card, choose wisely. Choose one card with the lowest annual interest rate, and only charge what you can afford to pay off when the bill comes. Be sure you will not exceed your credit limit. Putting purchases on a single card helps you keep track of spending (check balances online or by phone if you are not sure),
Be sure to check your current credit limits before you begin using credit cards, too. Many card issuers have lowered credit limits in the past year.
Increasingly, American society focuses on spending as the centerpiece of holiday celebrations. That means many people will go into the red by racking up debt at this time of year. Debt at the holidays is often just accepted, just as many people accept overindulging in food or drink as part of the celebrations. But these actions have real repercussions. It is possible to avoid debt and holiday overindulgence by planning ahead- and using a few tricks to eke out extra holiday buying power.
If you really want to pay down your credit card debt quickly, let’s face it, you’re going to have to make some sacrifices. As often in life, the things that create the greatest discomfort in the short run, can end up conferring the greatest benefits in the long run. And so it is with credit card debt. If you cut back on some of your largest recurring expenditures, you will free up money to pay down your debt much more quickly.
This will, inevitably, be a painful affair. Most of us have gotten so used to our creature comforts that we think we cannot live without them. However, if you’re really struggling with credit card debt or other types of debt, the consequences of defaulting on the debt will be much more painful than foregoing some of the comforts you currently take for granted. Plus, you don’t have to cut back forever! Once your finances are back under control and you have wiped out your debt, you will have money left over to scale your lifestyle back up. So take a deep breath, relax, and sit back. Here goes.
1. Cable TV. Yes, we feel your pain. After all, cable is like the holy cow of American households. However, if you carry high credit card debt, you don’t have the money for cable. Just because you can charge it, doesn’t mean you can afford it. So, take a deep breath, and get rid of that $80-100 monthly charge. That money will go a long way towards paying down your debt each month. Once the debt is paid off, you can always reevaluate whether or not to get cable again, unless, of course, you decide that having a cable subscription is not a life or death matter after all.
2. Dump your cell phone. It’s hard to imagine that less than ten years ago we all got along just fine without a cell phone. But in fact, we did. So, take a break from the mobile; or cut your subscription to the most basic, enroll in Friends and Family programs, and talk mainly on free minutes.
3. Get a Cheaper Car. So what if your car doesn’t look like it’s straight off the assembly line. There are plenty of reliable, low-maintenance, ten-year old cars around, costing you a fraction in monthly costs.
4. Start Cooking. Okay, so you don’t have to become a Julia Childs, but cooking your own meals instead of eating out isn’t just healthy for your wallet, it’s good for your body as well. And while you’re at it, junk those expensive, unhealthy habits. Stop smoking; scrap the junk food, avoid sinking money down the drain guzzling soda pop or expensive lattes. It’s a great way to tighten the belt, so to speak, and free up money to pay off your credit card debt.
5. Take a Shopping Break. With the exception of groceries, put a moratorium on spending for six months. Most of us have plenty of stuff, much more than we need. Avoid going shopping for six months; postpone major purchases; avoid purchasing new clothing (unless it’s for your kids); pass up on gadgets, thingamajigs, and irresistible sales offers; shun the mall. At the end of six months, make a list of the things you absolutely do need, and purchase those. Rinse and repeat. If you keep taking six-months shopping breaks; you’ll be surprised how quickly you can wipe off that debt.
Let’s face it, radically changing your spending habits in this way won’t be pleasurable. However, treat it like an experiment in reevaluating priorities and trying out some new lifestyle habits. At the end, you may find that you haven’t just succeeded in wiping out your credit card debt, your old habits may have been replaced by some new hobbies and interests in the process. Good luck!
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February 5, 2010 | Posted by Kevin Byrd 
Categories: Debt Reduction, Uncategorized | 
Tags: Americans credit card debt, Consumer credit, credit card | 
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If you really want to pay down your credit card debt quickly, let’s face it, you’re going to have to make some sacrifices. As often in life, the things that create the greatest discomfort in the short run, can end up conferring the greatest benefits in the long run. And so it is with credit card debt. If you cut back on some of your largest recurring expenditures, you will free up money to 
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