WHEN WILL THE OTHER CONSUMER FINANCED “SHOE” DROP?

THE SHOE THAT THE CONSUMERS BOUGHT AND FINANCED WITH THEIR CREDIT CARDS

Following behind the subprime mortgage lending collapse may be a crisis in credit card debt. An article in Sunday’s Chicago Tribune entitled “The Next Credit Crunch- As home loan market tightens, mounting credit card debt could spur new crisis”, describes the looming risk.

Now that the easy money in home mortgages is all but over, consumers may soon be caught in a financial squeeze with their credit cards.

That's the worry among some economists and credit counselors as home lending has shifted abruptly into low gear this summer. That leaves homeowners owing big sums to Visa or MasterCard without an important escape hatch -- the ability to pay down the plastic by dashing off a check from their home equity line of credit or rolling the debt into a new, bigger mortgage.

THE END OF THE “MOTHER LODE”

Large gains in consumer spending, and credit card financing, came from rising real estate values. Consumers could take out home equity loans using the expanding equity in their homes caused by increasing prices. But that honey pot has since crashed on the floor.

...many consumers were rolling their credit card debt into their homes. No one knows precisely what that figure is, but Nilson Report publisher David Robertson estimates it might have added $288 billion to the $880 billion in outstanding credit card debt at the end of 2006. That would mean credit card debt had increased by about 225 percent in the past decade

EXPERTS NOTE THAT THE CREDIT CARD CRUNCH IS NOT YET IN FULL SWING

Diane Swonk, chief economist at Mesirow Financial in Chicago, isn't worried.

”Much of the shakeout in credit quality occurred in the 1990s," she said last week. "It's really amazing not to see the default rate for credit cards track mortgage defaults, but that isn't happening."

Not yet.

Ironically, credit card companies often do best right before the industry is about to tank. That's because consumers who are stretched are making only minimum payments and racking up heaps of interest on their unpaid balances, trying to keep all their financial balls in the air. But things can worsen quickly when an unexpected expense arises or their adjustable-rate mortgage payment increases. When people hit a wall, they begin missing payments or not paying anything at all. They eventually may find themselves seeking the advice of bankruptcy attorneys.

KEEP YOUR CASH IN YOUR POCKET IN THE DESERT OF THE REAL!