Holiday debt may eventually require credit help

Experts say that as consumers return to borrowing more on their credit cards to fund their holiday gift shopping efforts this year, the damage done by overspending can lead to dire consequences.

In the years immediately following the end of the recent recession, consumers’ indebtedness on their various credit cards slipped significantly from the levels seen before the financial crash, but have been steadily rising again for the last year or so, according to a report from MarketWatch. The latter trend is expected to continue throughout the holiday season, as consumers lean on their credit cards to bankroll their various shopping efforts, and that has experts worried about the effects on people’s finances and credit as they head into the new year.

The problem with more borrowing

In theory, with improving economic conditions such as lower unemployment and rising wages, consumers might have the ability to handle whatever new debt they take on, the report said. But one trend that has experts particularly concerned this holiday season is that in many cases, the people obtaining new lines of credit in the last few months, or taking on more debt on accounts they already had, are those that may be in a more vulnerable financial position.

Demand for credit is still high among those who may have previously been locked out of the credit ecosystem in the past — especially as lenders tightened restrictions during and immediately following the recession — because missteps they made during that time might have forced them to eschew borrowing, the report said. But now, as many make steps to once again improve their standings, and feel better about their finances, they might be looking to borrow again, and institutions are all too willing to accommodate those demands.

Data from TransUnion suggests that nonprime borrowers are the major beneficiaries of the increased lending efforts from major financial institutions this holiday season, with about 30 percent of new credit going to those with credit scores that might not have qualified for accounts just a few years ago, the report said. The reason for this is that many people who have scores considered prime, or better, may not have the appetite to expand their borrowing efforts.

“Banks want to lend,” Steve Chaouki, group vice president for the financial services business unit of TransUnion, the credit-rating bureau, told the news agency. “And there isn’t much demand for credit from prime consumers.”

The potential cost

The problem with all this excess borrowing is likely three-fold for consumers, regardless of their current credit standing, the report said. The first is that a recent poll by myFICO, a branch of the company that pioneered credit scoring, found that 25 percent of consumers will need more than three months to pay off the debt they rack up during the holiday shopping season, which in turn will likely come with interest charges that can increase the cost of these gift-buying efforts significantly.

The one-quarter who felt this would be a realistic proposition for them was up from just 18 percent in 2010, indicating that consumers may be more comfortable dealing with excess debt these days, the report said. And of course, those who have lower credit ratings are also likely to have higher interest rates on their credit cards, meaning that carrying a balance over from one month to the next will be even more expensive for them than it might have been prior to the recession.

Another problem is that all the additional holiday borrowing may be a harbinger that more debt looms just over the horizon, the report said. TransUnion estimates that over the course of 2013, the credit card debt totals will likely climb to the levels observed in 2009, when they hit their all-time high.

Finally, it also seems likely that due to all the increasing debt, which is rising at a rate far faster than the economy is improving, and lending opening to borrowers with rockier credit histories, that instances of late payments and defaults will increase, the report said. Earlier this year, the 90-day delinquency rate slipped to lows not seen since 1994, but has been steadily rising over the past few months, and that trend, too, should continue throughout next year as it moves back toward historical norms.

Consumers should be aware that higher debt totals and late payments are the two largest factors lenders consider when weighing a consumer’s credit standing. Combined they make up 65 percent of a total score. As such, borrowers should try to avoid these missteps to maintain healthy ratings. However, it’s also wise for them to order copies of their credit reports, and check them closely for unfair markings. If any are discovered, working with a credit repair firm may help clear up the issue.

Posted in Finance
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