Credit Canada

We knew it would come -- the Day of Reckoning.

Fact is overly-indebted consumers can't keep borrowing against their future to stay afloat today. Sooner or later, the house of cards will collapse.

Well, you can blame gouging energy prices and higher interest rates for finally bursting the consumer bubble, which will hit in the U.S. and drag down Canada, according to a new economic outlook by the Conference Board of Canada. "Consumer spending in the United States barely flinched as energy prices tripled in recent years, but the party is expected to wind down," said Kip Beckman, the board's principal research associate.

He went on: "High energy prices and the rising cost of borrowing mean that households will have less disposable income to spend."
To me, it's all been a false sense of economic stability, as consumers flocked to the malls, armed with cheap lending rates encouraging them to buy now, pay later.

HARD LANDING

Then came a growing sub-prime market, which made interest-only mortgages easily available to consumers who'd maxed out credit cards, and were struggling with record household debt. As long as real estate values kept rising and consumers were willing to borrow against home equity -- keeping creditors happy was easy.

But now the Conference Board warns of a "hard landing" in overheated real estate markets -- while economic growth in the States slows to 2.7% next year, after a strong first-quarter bolsters growth to 3.4% this year. A wild card is oil, and if prices head to $80 US a barrel, run for cover.

Meanwhile, signs that consumers -- who account for two-thirds of the economy -- are in financial trouble are now starting to emerge.

The biggest sign of consumer financial distress is late payments on credit cards, and according to the American Bankers Association, the percentage of credit card payments in arrears by 30 days or more jumped by 4.40% during the January-March quarter.

Experts warn even higher delinquencies are on the way, not just on credit cards, but on other loans and mortgages, after the Federal Reserve hiked short-term rates against last week for the 17th consecutive time.

Another sign of consumer financial distress is an increase in the number of people seeking credit counselling. As one credit expert with a Houston-based counselling agency commented, it's not just rising costs for gasoline and utilities pushing consumers over the edge. "People refinanced (their mortgages) six months or a year ago, so the 'house bank' is empty. Most can't go back and tap their home equity again," said Catherine Williams of Money Management International.

RECORD  HOUSEHOLD DEBT

Here in Canada, consumers carrying record household debt now approaching $1 trillion, are also seeking help from credit counselling.

"We are seeing similar trends in Canada. The high cost of electricity, heating homes and gasoline, coupled with high interest rates, means Canadians have less money to service record debt levels," said Laurie Campbell, executive director of the Credit Counselling Service of Toronto.

Campbell's advice is don't run to lenders of last resort for help. "Their high lending rates and fees will only make matters worse," she said.

The best thing to do is sit down, work through the bills and if you're using one credit card to pay off another, or skipping payments, seek credit counselling.

"It's free, and we offer demand counselling daily from 8 a.m. to 8 p.m.," said Campbell. Call 416-228-DEBT (3328). You can also go to creditcanada.com for an online assessment.

*Reproduced with permission – Toronto Sun.