This guest post was written by Bob Brooks, host of the Prudent Money Radio Show and President of Prudent Money Financial Services. For more information please visit www.prudentmoney.com.
About a year ago, I wrote that things might really start to change in the process of how credit card companies go after consumers who have defaulted on their accounts.
The storyline in recent months has been that we are in better financial shape than we were this time last year. While that may be true by some measures, CardHub.com released the Q1 2010 Credit Card Debt Study this week, which revealed that consumers are on track to end up with more debt at the end of 2010 than 2009, despite positive signals in the economy.
The CardHub.com study focused on consumer debt data from the Federal Reserve’s G19 report in conjunction with quarterly charge off data to determine how much of the decline in consumer credit card debt is actually due to consumers paying down their debt versus bad debt being written off. The study also made projections on how much debt consumers will accumulate in subsequent quarters of 2010.
This guest post was written by Manny Davis. Manny is President of Back Taxes Help, LLC, a tax resolution firm that helps businesses and taxpayers pay back taxes. Visit BackTaxesHelp.com for more information on various IRS tax settlement solutions.
Every year millions of Americans find themselves with back taxes or tax bills they cannot afford to pay all at once. Whatever the cause, the IRS is willing to work with taxpayers and offers a variety of Installment Agreements (IRS Payment Plans), depending on the total amount they owe. An IRS Installment Agreement (IA) will allow you as a taxpayer to pay off your taxes through monthly payments that can last anywhere from three to five years depending on the amount you owe.
I had a fascinating conversation with Mr. Herb Weisbaum, AKA the MSNBC.com ConsumerMan, about the scams we should all be aware of. It was an eye-opening conversation, one that I hope will save you a lot of pain and anguish.
Surprisingly, your credit card account is not on the scammers’ most-wanted list. “Con artists are trying not to use credit cards [in their scams] because the charges can be reversed,” Weisbaum said.
More and more American families these days are learning to live within their means. They’re making trade offs about what they want, what they need, and what they can afford. They’re trying, during these hard times, to make their dollar stretch as far as possible. You’ll notice that what they aren’t doing, or at least not in great multitudes, is borrowing against their future so as to maintain their lifestyles. Sure, the draw to live as one has become accustomed is strong, and likewise, the ability to buy on credit is still a possibility. Were there no repercussions, were it simply a case of someone saying, “here take this, no strings attached,” we wouldn’t need to make sacrifices so that we can live within our means. However, when we know that there will be repercussions for our spending, that the credit card bill will come or that the bank will want their money back, we also know that we are going to have to do more with less.
Note, this is not a post about family budgets, but a post about national budgets. America, like America’s households, needs to learn to get more done on less money. Just as with those households, it is easy for the country to buy on credit, on the assumption that we can repay at some later date… far too easy in fact. Very little will stand in the way of our nation going deeper into debt, but just as with a normal household, someone has to eventually pay the bill. That money is not given to us—it comes with repercussions. Our President seems to be operating in the same mode as his predecessor: putting our nation into deeper and deeper debt so as to pay for all the projects that he wants to start or maintain. Congress raised the federal deficit cap in February of 09, they raised it again this month, and are poised to raise it again next month as part of a larger economic bill, currently before the Senate. Simply raising the amount of debt the federal government allows itself to accrue is easy enough to do.
On January 14th, Congress voted to increase the federal deficit cap to $12.4 trillion having raised it from $12.1 trillion February of last year. The bill was a concession by Democrats who had planned an attempt to increase the federal deficit cap by $2 trillion in order to prevent having to call another vote before next year’s midterm elections. Already, Democrats are pushing to increase the deficit cap again by mid-February to prevent the U.S. government from spending more than it is allowed and therefore default on certain obligations. Because the government tax revenues simply cannot cover the rate of government spending, both the national debt and the interest on that debt continue to grow. For most Americans, this is cause for concern.
Not for Congress though. The increase to the deficit cap follows on the heels of last year’s huge omnibus spending bill signed into law on December 16, 2009 which earmarked $446.8 billion for special projects and increased federal spending by 10 to 12%. Its the kind of thing that can only make it into legislation in December when lawmakers are in rush to make it to the holiday recess and haven’t had the time to give proper vetting to the measures on the table. It was a holiday surprise for the average tax-payer and a gift to the numerous special interest groups that, sadly, have influence on our lawmakers. We may recall that it was just such an omnibus spending bill that legalized Credit Default Swaps. In 2009, despite the fact that the federal government had reached the limit of money that it could borrow, the omnibus spending bill wrapped together 6 different lesser spending bills and had provisions for over 6,000 back home projects for the lawmakers who sponsored it.
If you haven’t received a notice from your credit card company that your rates are increasing, well, you probably don’t have a credit card. What some people are missing among the fine print is that many cards are changing their rate structure from a fixed rate to a variable one. So, what’s the difference, why is this happening, and is this a big deal?
According to the OCC, a fixed-rate credit card means that the Annual Percentage Rate on the account “is not tied to an index that may change periodically.” Variable rates are generally tied to an index rate, such as the Prime Rate.
The bulls are pointing to the end of a recession and a robust recovery ahead for the American economy. Their optimism is based on a definition of the recession, in economic terms. For economists, a recession ends when the economy ends its negative growth. These terms, however, are theoretical. In practice, a robust recovery must parallel a robust recovery at the American household level, which is unlikely to happen for a number of reasons:
Many economists are calling for more stimulus money by the federal government, but it is clear that what the country really needs is smarter spending. We desperately need to make investments with government funds that will deliver strong returns on the nation’s money, and thus, we believe that the federal government ought to invest in new technologies that will turn America’s trade deficits into strong surpluses. It is precisely for that reason that this is the right time for a ‘Manhattan Project’ on energy independence.
According to the Federal Reserve, the credit card charge-off rate for the first quarter of 2009 jumped over 80% to a record 7.51% - meaning that the balance on roughly 1 out of every 13 credit cards is in default. Additionally, in May, the number of bankruptcy filings reached 6,020 a day, which represents a 33% increase from a year earlier. To address the concerns of the multitude of consumers facing these challenges, CardHub.com, the leading and most robust online credit card marketplace, today announced the addition of a Credit Card Debt Center to its site. Launched in July 2008, Card Hub continues to revolutionize the consumer selection process for products and services in the personal finance space.
The Credit Card Debt Center includes two key features: Debt Help that provides consumers with customized debt management advice and Debt Education that offers an in depth understanding of the pros and cons of various debt solution options. Highlights of these features include:
Campbell Norwood has written a book that will be of great interest to our Wallet Blog “Deals” readers. Titled Recession $urvival Guide: Low-Cost and No-Cost Strategies to Spend Less, Save More!, her book is full of low- and no-cost opportunities for stretching one’s household budget.
“I wrote the Recession $urvival Guide from the perspective of knowing that there are a lot of families in our area, and around the US, who have never dealt with economic recession. They’re scrambling, embarrassed, and don’t know what to do,” Norwood said. “My goal is that readers will be empowered to make no-cost and low-cost changes.”
College, the key to a better paying career, is not without its financial burden. The price of tuition around the country is going up. Plummeting stocks have hurt university portfolios as well as the portfolios of alumni and professors. Because of this, American universities are receiving fewer contributions from private sources even as they continue to pay for tenured senior professors who, having lost their nest-egg, are stalling their retirement. Public universities face these dilemmas as well as a dwindling slice of the state budget that funds them.
Of course, students still need to go to school during these hard times, but the rising price of tuition and the absence of job opportunities for graduates just entering the work force has made the once viable option of student loans less and less attractive as there is little guarantee that a job will be waiting after graduation. Today’s graduating senior can expect to acquire $22,000 in student loans by the time they graduate and have no guarantee of entering into a career just out of school that will help them to pay off this debt.
President Obama has asked his cabinet to cut 100 million dollars of government spending by finding ways to make government more efficient. His hope is that by finding 100 million dollars worth of waste, he will help to restore taxpayer faith in their government’s attempts to keep the economy healthy.
The subject of government spending is a hot topic here at Wallet Blog. We are in agreement with the President’s basic philosophy that the government needs to spend money to get us out of this recession—it’s about the only thing that helped the United States get out of the Great Depression. The system needs money and that money has to come from somewhere. If regular citizens are unable to stimulate the economy, then the government must intervene. To this end, we support, generally, President Obama’s decisions to inject cash into the system so as to support fiscal growth and to create job opportunities in a period of rampant unemployment.
As more and more big name companies become insolvent, taxpayers and shareholders in these companies are losing money. Bondholders, on the other hand, are not feeling the hit and are actually making money out of bailed out companies. Given the size of America’s economic problems and the ways in which these problems seem to affect all of us, it makes no sense that bondholders aren’t feeling the effect as well.
A bondholder is essentially someone who has loaned money to a company. When a company needs cash, it either issues stock to shareholders or takes out loans. Thus far, if the stock goes down, investors take the hit. If the company requires government bailout, taxpayers must pay for the company. However, even when a company is on the brink of total collapse, and must be brought under federal regulation to keep it from failing, that company is still expected to pay off its debt at the rate set at the time of the loan. So long as the company has not gone bankrupt, it must still repay its creditors, including its bondholders.
As we discussed, in our previous post “Stimulus Plan Misses A Golden Opportunity“, the Obama administration spending bill concentrates on mending America, whereas it should be concentrating on getting America set to make a strong return to the world market after the recession. In this post we’re building off of that idea and making some suggestions about how the government spending should be used to support America as a global economic leader.
President Obama is now in a position with his spending bill to invigorate the economy, just as Presidents have done in the past. What we should remember is that when the American government has, historically, spent money to revive the economy, its most notable successes were not related to improvement or repair, but to innovation. A concentration on the development of new technologies has always signaled eras of prosperity for America.
The Obama administration’s stimulus plan is commendable for its size, its urgency, and its impact. At Wallet Blog, we believe that it will be a powerful force in getting us out of the recession. We do not, however, agree with the areas and projects to which the money is being funneled because the concentration is not on innovation. The competitiveness of our country comes down to how much the world wants to buy from us, rather than how much we want to buy from the rest of the world, and the stimulus plan does not concentrate on the development of new products.
Instead, the areas of spending are aimed at areas like increasing the quality of America’s roads and bridges, providing incentives for the weatherizing of homes, and providing tax cuts. All of these improvements are good in the plan’s short term goal of ending the recession, but they do nothing towards making the rest of the world want to buy things from us. Part of the reason we are in a recession is America’s inability to sell new products in the international marketplace.