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Credit counselor: 'Stop using credit cards'

Times Business Writer
Sunday, August 8, 2004

Area consumers could find themselves in a budget crunch, as rising interest rates combine with regional job loss and increased property taxes to deal a one-two punch to their pocketbooks.

The Federal Reserve in June raised interest rates by a quarter of a percentage point, to 1.25 percent, from a 46-year low of 1 percent.

A second hike, of one-quarter of a percentage point, has been predicted when the Fed meets next week.

Those carrying credit card debt at variable interest rates, like those with adjustable rate mortgages and other loans, are likely to see corresponding hikes in their monthly bills.

The increase could be enough to flatten some area residents, already struggling against a downturn locally in manufacturing and a hike in property taxes resulting from a statewide reassessment, said Pamela Stalling, of the nonprofit Consumer Credit Counseling Service of Northwest Indiana.

"When a homeowner is already experiencing difficulty, they could end up out of their house by trying to pay a credit card and not paying their mortgage," said Stalling, whose agency counsels those in budget crisis.

Credit card debt carried by the average American was $8,562, according to American Consumer Credit Counseling, amounting to a total U.S. credit card debt of $60 billion.

The consumers Stalling sees didn't accumulate plastic debt by spending wildly, she said. Rather, they'd gotten used to a higher income level when economic times were better in Northwest Indiana.

"People used to live on overtime," Stalling said. When that ended as area steel mills and related manufacturers cut back, consumers failed to adjust their budgets, Stalling said. And, "they didn't change their lifestyles."

Americans who loaded up on debt during an era of low-interest rates could be in for a letdown as interest rates rise, said Frank Stafford, a University of Michigan economics professor.

Average interest rates on variable rate credit cards was 13.53 percent last week, while the average rate on fixed-rate cards was 12.79 percent, according to Bankrate.com.

The interest rate on variable-rate cards is directly tied to the prime rate and moves in response to adjustments made by the Fed.

A fixed-rate card is not tied directly to the prime rate; however, fixed-rate cards reserve the right to increase their rates periodically.

The rise in interest rates was meant to signal confidence in the nation's economic future, said Richard Curtin, director of the University of Michigan Surveys of Consumers.

"What causes interest rates to go up is a greater potential for employment growth and income rate," Curtin said.

"Consumer interest rates will go up if the economy becomes stronger and more robust. Consumers will have greater incomes, and as their incomes increase they will purchase more and charge more," he said.

Even at current rates, interest is far lower now than in the early 1980s, when average rates were between 18 percent and 21 percent, Curtin said.

It's not likely rates will get that high again, he said.

"We don't have the same kind of problems in the economy as we had then," he said. "The economy is in much better shape."

Even a rate hike of 1 percent isn't likely to have a huge impact on most credit cardholders, said Don Coffin, Indiana University Northwest associate professor of economics.

A cardholder carrying a balance of $5,000 might wind up with an extra $4 to $5 in interest charges a month, Coffin said. "But $5 is still $5," he said.

The impact is more likely to hit long-term, as payments stretch out to cover the increased cost of borrowing, said Greg McBride, an analyst with Bankrate.com.

"The higher rate on a credit card doesn't necessarily translate into a higher monthly payment," McBride said. "Instead, the borrower will be repaying that same debt for a longer period of time."

Those already struggling to manage debt could be feeling the impact sooner, said Robert Currier, education director with American Consumer Credit Counseling.

"These people are in debt now, and they can expect to be further in debt," Currier said.

Currier's advice: "Stop using your credit cards."



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