Monday, February 18, 2008

What To Do, What To Do?

Reina Bolanos got a loan for her used Honda Odyssey in 2006 on what appeared to be favorable terms: $16,000 without a down payment. Though the 8 percent rate was high, Bank of America offered to spread the loan over six years to keep the monthly payments down.

But the secretary from Silver Spring found that raising her young children cost more than she had expected, and she now worries about losing the car after missing her last two payments.

A growing number of Americans are buckling under the weight of debt as the troubles that started among homeowners with subprime mortgages last year spread to other consumers who rely on credit. Auto loan borrowers are having an especially hard time. The number of people more than 60 days late on their car payments has spiked to a 10-year high, according to Fitch Ratings.

Similar problems are brewing for credit card holders. Card balances written off as uncollectible by banks have jumped 24 percent, and late payments are up 16 percent from a year ago.

Like the mortgage market, consumer credit boomed in recent years as lending standards loosened. Unorthodox auto loans lured consumers to buy cars they otherwise couldn't afford. Credit cards teased holders with introductory rates that soared after a few months. Now, more people are struggling to keep up with their bills under the strain of growing job losses and an economic downturn.

Bolanos, 27, has been using her credit card to pay utility bills and buy groceries, even though the card is nearly maxed out. She's racked up $5,000 in credit card debt. With monthly car payments of $400, $1,335 in rent for her two-bedroom apartment and sizable day-care bills, she's overwhelmed. She and her husband, a construction worker, earn a combined $50,000.

"It's just so stressful," Bolanos said. "To be young and to have a family going through this, it's hard."

Consumers borrow more money today than at any point in history, and they are increasingly using credit to pay for nearly everything, from cars to groceries to electricity. Consumer debt reached an all-time high of $2.55 trillion in December, nearly double from a decade ago, according to the Federal Reserve. Some economists say Americans are simply paying the price of their addiction to debt and are now more vulnerable than ever to credit downturns.

Behind the rising defaults is a tale of two Americas. Those with good credit will almost certainly see lower rates on cars and credit cards as the Fed continues to cut rates this year. But those with bad credit are facing rising rates and being forced to put more money down on cars. Some may not be able to get a credit card or auto loan as banks, spooked by the mortgage mess, have been reassessing the risk of making loans.

"It's going to be much more difficult for those people who are already in credit distress than it is for those of us who are fortunate and have full-time jobs," said Tony Cherin, a finance professor at San Diego State University.

But others worry that even those with good credit will share in the pain. The financial woes that started among homeowners with questionable credit histories -- the "subprime" borrower -- have sparked a downturn in the housing market.

"It's not only people who are stuck with the subprime mortgages. It's your average American," said Todd Cook, president of, which refers financially stressed people to firms that can help them. "It started with mortgages, but it's spilling over. If it's not their homes, it's their credit cards. If it's not their credit cards, it's their autos."

More here.

I haven't seen any figures yet that break down this kind of increasingly-common bad news by sex, but women tend to suffer more during bad economic times, for a number of reasons. First, women still suffer from the "last hired, first fired" policies that a number of companies employ, as women tend, more than men, to drop in and out of the workforce to care for children and/or elderly parents. Second, women often face discrimination when they apply for credit, finding themselves paying higher interest rates at worse terms. Third, women tend more than men to depend for a portion of their family income upon absentee parents and, when those men lose their jobs or face financial difficulties that impact their second (or third) families, their childcare payments are often the first thing to go.

It's not easy, but there are proactive steps that women can take right now to help them ride out the coming rough economic weather:

First, take stock. Save all your bills and make a list of each one and what interest rate you're paying (it's on the bill). Are you entitled to child support payments that you're not getting? Better to sue for them now than when your ex-husband loses his job in the coming recession.

Second, pay off debt. Start with the bill with the highest interest rate. Pay as much as you can afford -- more than the minimum -- on that bill and pay the minimum on the other bills until that first highest-interest bill is paid off. Then, start on the bill with the next highest level of interest. If you can't pay even the minimum or can't pay more than the minimum on even one bill, you've got to do something. Sell the SUV and drive a used compact car. Get a part time job in the evenings or on weekends. Move to a cheaper apartment. Babysit at home or take in ironing or word processing.

Third, build up savings. Look at your take-home paychecks (and any child support payments that you get) for a month. Multiply that amount by six and you'll know how much you need to put away -- at a minimum -- for a rainy day. Start a direct-deposit savings program that will allow you to get to that point as quickly as possible. Depending upon your line of work, you may eventually feel even more comfortable with eight to nine months' worth of take-home pay in a savings account or other fairly liquid form of savings. Again, don't discount selling some assets and/or taking on part-time or extra work in order to build up that nest egg.

Fourth, max out your 401(k) or other retirement savings accounts.

None of this is easy, but none of it is rocket science, either. You don't NEED a flat screen tv, a big, fancy car, meals out every week, shopping as a form of entertainment or therapy, a vacation away from home this year, etc., etc. You do need to control your debt and to build up your savings. We're headed for some very bumpy financial times. Wise women take proactive steps while they still can.


Support Your Kids! said...

some good tips, but what exactly is six times zero which is the amount of child support I received over the last year.

I would suggest modifying the order of your priorities and ensure that one has some savings for emergencies so you don't have to borrow even more money at high interest before paying down debt.

Susan in Florida

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