Housing crash fuels rise in card debt
— -- Like many Americans, 34-year-old Jack Zenteno and his wife, Betty, found their finances taking a severe hit from the housing crisis.
"My wife went into real estate right when the market began to fall apart," Zenteno said. "And it occurred at the same time I lost my job."
With no savings to draw from, the Zentenos found themselves quickly racking up $30,000 worth of credit card debt — mostly to pay for daily expenses.
As more homeowners struggle with skyrocketing house payments, several experts expect many of them to start using their credit cards as a means to get by. Once unpaid balances reach five figures and interest rates creep past 20% or even 30%, however, credit card users face trouble.
"Anybody who is having trouble servicing their mortgage is going to try using credit cards to finance those other expenditures," said Tom Cargill, an economics professor at the University of Nevada, Reno.
Nationwide, the use of revolving credit — fueled largely by credit cards — kept increasing throughout 2007, according to a recent consumer credit report by the Federal Reserve. Use of revolving credit rose 11.3% in November. In comparison, revolving credit increased 6.1% in 2006 and 3.1% in 2005.
The rise in credit card use has led to brisk business for counselors specializing in debt reduction and financial management. Reno-based Consumer Credit Counseling Service of Northern Nevada has seen demand for its services double after the housing market started its downward spiral in 2005. The increase has been fueled by consumers struggling with credit card debt, said consumer credit counseling service manager Natalie McKinnon, who has seen people come in with as much as $100,000 in credit card debt.
Used wisely, credit cards can be convenient, particularly for people who exercise discipline and pay their balances in full each month. In 2006, 40% of credit card users paid their balance in full every month, according to the Federal Reserve.
But large unpaid balances can be trouble. A $50,000 credit card debt at 24% interest, for example, means users will need to pay an extra $12,000 per year on top of their regular payment, Cargill said. Add extra fees and all sorts of penalties to the mix, and credit card owners can dig themselves a very deep hole. Even credit card debt that's only in the hundreds can be a big deal for consumers with low incomes.
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