Earn What You Spend

The consumer credit card crisis is underway.

Consumer debt has far outpaced real growth in wages:

Source: Innovest

And we’re beginning to see the ramifications of this.  From this morning’s NYTimes:

After years of flooding Americans with credit card offers and sky-high credit lines, lenders are sharply curtailing both, just as an eroding economy squeezes consumers.

Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001.

What does this mean?

Americans have used this form of consumer credit at an unprecedented rate.  Largely, it has been used to finance our lifestyles (new TVs, electronics, etc) even while our real wages have not risen proportionally; we haven’t earned what we have been spending.  And now those credit card bills are coming due, and a greater percentage of consumers are failing to pay.  

It is bad news for everyone:

• The consumer has their credit score wrecked
• If the consumer is completely unable to pay, it is even more difficult to file for a Chapter 7 bankruptcy, where all your debts are basically cancelled
• Credit card companies take large losses
• To offset those losses, credit card companies further restrict available credit by reducing credit lines and denying applications
• Credit card companies also offset these losses by raising fees on all customers, making credit more expensive

So, even those who are credit-worthy are having a difficult time getting access to the credit they need:

Big lenders — like American Express, Bank of America, Citigroup and even the retailer Target — have begun tightening standards for applicants and are culling their portfolios of the riskiest customers. Capital One, another big issuer, for example, has aggressively shut down inactive accounts and reduced customer credit lines by 4.5 percent in the second quarter from the previous period, according to regulatory filings.

Whatever the losses the credit card companies face, what we know for sure is that this is feeding into the same feedback loop we’ve faced for a while.  With consumers relying heavily on credit cards to finance their spending, and with consumer credit increasingly difficult or expensive to attain, consumer spending will continue to drop.  That means a a further drop in the GDP, more job losses, and, back to square one, more defaults on credit card debt.  

What we desperately need now is a way to break these cycles.