This morning’s discussion about credit cards and emergency funds was interesting. Many commenters noted that if you have a history of using credit responsibly, a credit card can actually make an acceptable buffer in case of the unforeseen.
JenK made an analogy I like: “Credit cards, like knives, are not risky in and of themselves. People chop onions and peppers all the time without cutting themselves — though someone with a history of cutting might rather buy them pre-chopped.” The problem, of course, is that many people who don’t know how to use knives — or credit cards — get themselves into trouble.
A couple of readers pointed to interesting articles at other sites. Bornbad mentioned a Reuters story that describes how stressed borrowers use plastic to delay default. It seems the subprime mortgage crisis may have a domino effect. Some people purchased houses they could not afford, and have been staving off disaster with their credit cards:
Rising mortgage payments and tighter lending standards for refinancing amid the subprime credit crisis have dried up once-easy access to home equity loans for many middle-income borrowers — so desperate borrowers are using credit cards to cover basics while trying to keep up with home payments.
“When credit conditions dry up, marginal borrowers turn to plastic,” said Merrill Lynch North American Economist David Rosenberg. “We’re seeing signs of that already.”
In an October 5 research note, Rosenberg called rising credit card delinquency rates as the “next skeleton in the closet.”
It is one scary skeleton — and a specter of bankruptcy.
The problem with using credit cards — with their high interest rates — to stave off default brought on by “reset” adjustable mortgage interest is that it merely postpones an inevitable crisis, said Gregary Brown, social policy director at Metropolitan Family Services in Chicago.
“Our biggest concern right now is that there are lot of people who will face a choice between bankruptcy or foreclosure,” he said. “Either way, it’s going to suck.”
According to the article, U.S. Federal Reserve data indicates revolving consumer credit — mainly credit and charge cards — is rising rapidly. More worrisome, credit card delinquencies have reached a three-year high. And, as many GRS commenters who read the Reuters article noted, there’s this ominous sentence at the end of the piece: “The U.S. holiday retail spending season is rapidly approaching and, according to Rosenberg and others, this could push many home owners over the edge.”
Meanwhile, escapee wrote that the credit crisis goes beyond just the United States. In Fortune magazine, Peter Gumbel notes:
If there is an international precedent the U.S. should be watching, it’s actually that of the U.K. British consumers are just as overstretched as Americans, but since the real estate market there rose faster and fell earlier, they’re about 18 months ahead in the credit cycle. Since the last quarter of 2005, credit card delinquencies and charge-off rates in Britain have risen as much as 50%, forcing banks to take huge write-offs.
It’s a sign of the times that, according to one survey last month, 6% of British homeowners have been using their credit cards to pay their mortgages. That’s suicidal, of course, given that credit card interest rates are more than double even the heftiest mortgage. Keep your fingers crossed that it’s not a trend that crosses the Atlantic.
But as the first article noted, the trend is already here.
I know that many Get Rich Slowly readers are struggling with debt. I encourage you to put aside the plastic whenever possible. (I had to destroy my personal credit cards in order to overcome my debt.) Do your best to accumulate an emergency reserve. Continue to move toward your goal. With hard work and good fortune, one day you will reach a place where you no longer feel the need to rely on credit. We’re here to help you on that journey.
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