A constant tug of war with lenders is leaving consumers with a large pile of debt and bankers without customers.
By Ace Reporter
As the recession grinds on, more people are being forced to rely on their plastic, and increasingly skittish banks are cutting back on how much they’ll lend.
Now, more and more credit card debt is going delinquent and the middle class is starting to feel the pinch, experts say.
The credit card crunch is affecting people in different ways as economic conditions deteriorate and borrowing limits are reduced.
The amount of delinquent credit card debt has almost quintupled in about three years at Suncoast Schools Federal Credit Union; it was $3.7 million near the height of the real estate boom in March 2006, and reached $17.1 million in June 2009 (the most recent month with data available).
Credit card debt is usually a major factor in bankruptcies as well, and the monthly number filed in Southwest Florida has gone from 24 in January 2006 to 723 in August 2009: up more than 30-fold.
Suncoast president Tim Montoya said like most lenders, he’s had to set tougher limits on customers’ credit cards.
“It’s not that you’re being so strict nobody qualifies, but we have an entire department working with people on forbearances and workouts and extensions,” he said. “More than we ever conceived of doing in the past.”
So you’re in debt. Now what?
As cash-strapped budgets meet lower credit limits, increasingly the result is that a consumer simply maxes out a credit card and stops paying.
Locally, consumers in trouble with credit cards or other debts are being directed to private, nonprofit agencies for assistance, including Consumer Credit Counseling Service of the Florida Gulf Coast at 278-3121 and Christian Financial Counseling at 337-2122.
The national charge-off rate – percent of delinquent credit card loans removed from the lenders’ books – hit an all-time high of 9.55 in the second quarter of 2009, according to the Federal Reserve.
That’s by far the highest rate for any kind of consumer credit, which had a total charge-off of 5.7 percent in the second quarter.
”That’s because for most people, the credit card is “the first bill people stop paying” when they get into financial straits, said Richard Wayne, senior director of public relations at the American Bankers Association.
“You’ll still pay your cable, your water and electric bill, and you’ll still pay your car payment,” Wayne said. “It’s part of the nature of credit card lending.”
Faced with that, lenders are trying to limit their losses.
“People who had $10,000 credit limits now have only $8,000 or $5,000,” Wayne said.
Banks pushing away and pulling in customers
But even as banks pull back for some customers, the banking industry hasn’t given up trying to lure new ones.
- In the second quarter of 2009, U.S. households received 349.1 million credit card offers
- down 67 percent from the 1.1 billion a year earlier
- off only 6 percent from the first quarter of ’09, according to Synovate (a market research company)
Some of the biggest lenders were ramping up their efforts, according to the Synovate study: Bank of America was up 77 percent and Citibank up 65 percent over the first quarter.
Aggressive marketing of cards and the tendency of some lenders until recently to increase limits repeatedly for someone close to reaching the maximum can push someone into bankruptcy eventually, said Carmen Dent, a Fort Myers-based bankruptcy attorney.
One of his clients with about $100,000 in credit card debt is on the verge of having to stop working and go on disability because of medical problems.
“This is debt that’s accrued over 10 years,” Dent said. “Usually if you make more than a minimum payment, they’ll increase your credit line.”
Now, Dent said, “there’s no choice. Ultimately it’s his decision, but there’s a strong likelihood of a bankruptcy.”
Borrowing: a better alternative?
As the downturn continues, people generally have been borrowing as little as possible. U.S. consumer debt outstanding has been falling steadily since the fourth quarter of 2008 although the total was still $2.5 trillion in June, the last month available, according to the Federal Reserve.
Montoya said he sees that trend in the Suncoast members’ borrowing.
“We’ve had overall fewer loans in terms of dollars,” he said, “our loan balances have decreased. People are cutting back, saving money.”
But for others, borrowing is a matter of economic survival.
“I use the cards because I own a business that’s trying to survive this economic crunch,” said Salvatore’s Gordon. “Six years ago I was flying high. I made good money, not lots of money.”
Now, he said, “I’m in the same boat as I would say the majority of the people who’ve lived not an extravagant life, but just to meet the bare necessities of life.”
See how credit card debt has affected other locals:
Maggie Pennyworthy’s story
Harvey Carson’s story
Consumer Reports: Credit card woes hurt consumer sentiment
Calculate your get-out-of-debt credit monthly payment
Motivational guru Tony Robbins explains how to get rich and out of debt
the dusty floor of my closet
