Drowning in Debt?
Americans' love affair with plastic may have a messy ending if interest rates rise
Spann says he does not feel he has a handle on his finances. Yet he may not be in as bad financial shape as some might think. He chose an interest-saving 15-year mortgage and has only about $6,000 remaining on it. While Spann is hesitant to take out a home equity loan to pay off his cards--because he says he is so close to becoming the first member of his family to own a home outright--doing so would lower his bills.
Though Americans' debt pile may be manageable while interest rates stay low, could consumers cope if rates rose? Some rates have been increasing since the Fed started tightening monetary policy in June 2004. In fact, the average credit card interest rate is nearing 17 percent, up from 15.7 percent in the past year. In the hottest housing markets, adjustable-rate loans account for over half of all new mortgages, according to Merrill Lynch. Millions could face higher monthly housing payments as rates rise, says Bert Whitehead, president of Cambridge Connection, a financial planning firm in Franklin, Mich.
Households have to worry about inflation, too, says Cheryl Burbano, a planner with American Express Financial Advisors near Tampa."You're seeing key expenses rising, whether it's gasoline prices or the cost of health insurance," she says.
Of course, for individual households, the final debt blow may come out of the blue, as it did for Tracy Moore. As this decade began, the 37-year-old Southfield, Mich., resident had more than $20,000 in credit card debt but was unfazed. Then, shortly after the Sept. 11, 2001, terrorist attacks, Moore was laid off from her job as an event planner for an advertising firm. Within about a year, her credit card debt had ballooned to $40,000, and she had no choice but to file for bankruptcy.
"When you're forced to live without a credit card, you understand what it means to live beyond your means," says Moore. "But I'm an intelligent person. There's no reason I shouldn't have understood what it meant a long time ago."
Yes, credit card debt has soared. But not all signs are dire: Delinquency rates have dropped, and Americans' net worth has grown substantially.
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