Wednesday, July 5, 2006

The Day of Reckoning is coming.

So says an article in the Toronto Sun, in reference to the indebted masses of Canadian consumers who keep on borrowing against their future to stay afloat today. Sooner or later, that house of cards will collapse and a massive pool of consumer debt is all that will remain.

Escalating energy prices and higher interest rates will finally take out the consumer bubble in the U.S. and drag down Canada, according to a new economic outlook by the Conference Board of Canada.

"Consumer spending in the United States barely flinched as energy prices tripled in recent years, but the party is expected to wind down," Kip Beckman, the board's principal research associate, said. "High energy prices and the rising cost of borrowing mean that households will have less disposable income to spend."

What we have been seeing all along is a false sense of economic stability, as consumers flock to the malls, armed with cheap loans encouraging them to buy now, pay later. This is a pattern that often leaves people strapped at the end of the month when vital bills are due, with no options remaining but to apply for a high-interest payday loan.

A lot of blame can be placed on the sub-prime mortgage market, which makes interest-only loans easily available to consumers have already rung up a serious amount of consumer debt. As long as real estate values kept rising and consumers could borrow against home equity, everything was going well.But now?

• Experts warn that overheated real estate markets are ready to come down hard while economic growth in the U.S. slows to 2.7 percent next year.
• A huge sign of consumer distress is late payments on credit cards. The American Bankers Association says the average percentage of payments in arrears by 30 days or more jumped by 4.40 percent from January-March.
• A wild card, on top of all this, is oil. If prices head to $80 a barrel, and gas prices soar even further out of control, run for cover.

Experts warn even higher delinquencies are on the way, not just on credit cards, but on other loans and mortgages, after the Federal Reserve hiked short-term rates against last week for the 17th consecutive time. This could lead to an even greater demand for risky, quick-fix options such as online payday loans.

In Canada, where consumers carrying record household debt now approaching $1 trillion, more and more residents are seeking help in the form of credit counseling.

"We are seeing similar trends in Canada. The high cost of electricity, heating homes and gasoline, coupled with high interest rates, means Canadians have less money to service record debt levels," said Laurie Campbell, Executive Director of the Credit Counseling Service of Toronto.

Campbell's advice is don't run to the payday cash advance lenders of last resort for help, saying their exorbitant rates and fees will only make matters worse. The best thing to do in order to break the cycle is to cut back on spending, make a firm budget and stick to it, and get the credit counseling you need.

This entry was posted on Wednesday, July 5th, 2006 at 9:14 am and is filed under Canada, Consumer Debt.