Monday, February 13, 2006

A perfect storm

Weathering stormy sea of rising debt
By Patricia Hasson

Several years ago, Warner Brothers released The Perfect Storm, an epicfilm about the impact of a cataclysmic storm formed by the confluence ofseveral severe weather systems in the North Atlantic. As the filmdramatized the storm's tragic impact on the crew and families of a shipknown as the Andrea Gail, the audience witnessed the bravery as well asthe folly of the crew in the face of doom they could not see but couldhave easily avoided.

A perfect financial storm may be brewing for many families in theeight-county Philadelphia region. A debt and savings survey of 833people completed late last year by Consumer Credit Counseling Service ofDelaware Valley revealed that debt loads were rising across the board,but particularly among people with low to middle incomes.

An alarming 33 percent of people with incomes of between $41,000 and$50,000 reported that their debt had grown last year. With many familiesstill feeling the effects of last year's holiday spending, it is likelythat debt will continue to go up. In fact, among the agency's 9,000customers who had one-on-one counseling sessions last year, the averagedebt was a little more than $14,000.

The reasons for our escalating consumer debt are diverse, but themost-cited reasons were the costs of housing, fuel, health care and"unexpected" expenses. And when we look ahead, there are several trendsconspiring to make it more difficult than ever to manage that debt.

Last year, the average cost of a barrel of oil, which governs the priceof heating oil, gasoline and a multitude of products used by industryand consumers, rose by 40 percent to nearly $55 per barrel. During 2005,the Federal Reserve raised the nation's discount rate by about 60percent to 5.25 percent. The discount rate is a benchmark thatinfluences the interest rate charged on such debts as mortgages, homeimprovement loans, and outstanding credit-card balances.

Now, federal banking regulators are trying to save consumers fromthemselves by issuing guidelines to credit-card companies and banksstating that monthly minimums should cover interest, any fees and extracharges, and at least 1 percent of the principal. Many observers expectthe immediate impact of the new guidelines will be to cause credit-cardminimum payments to double, creating pain for consumers as they get usedto a new playing field.

These dramatic increases are taking place in an environment where thepersonal income per capita among Pennsylvanians has been rising at nomore than 3 percent in recent years.

While the storm clouds are gathering, the situation for most of usprobably is not yet out of control. We can take steps to avoid or rideout the storm in a safe harbor. Recognizing potential financialdifficulties and what they may mean for us is the first step in avoidinglong-lasting debt and cash-flow distress, loss of property and a reducedstandard of living.

Since the interest charged on credit-card debt is often exorbitant - ashigh as 17 to 22 percent - the most important step you can take is toreduce your credit-card balance by eliminating it altogether, setting upa payment plan, or increasing your monthly payment well above theminimum, accelerating the payback of that debt. (Making only minimumpayments can increase the cost of goods purchased two or more times.)

Consolidating your debt and reducing the interest rate you pay are also viable solutions. Consolidating debt doesn't reduce it, but it is astart in the right direction. Also, be careful of loans that requireinterest-only payments for a period of time, since the payment of theloan is only being deferred.

Take steps now to avoid The Perfect (Credit) Storm.

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