Fed: Credit card, all consumer spending declines

As recession, layoffs continue, consumers ditch debt

By Jeremy M. Simon

Credit cards remained little-used in April, based on the latest data from the Federal Reserve, sending revolving debt levels sharply lower.

Consumer credit card balances plunge again in April

The Fed's monthly G.19 report on consumer credit, released Friday, showed that the second quarter picked up where the first left off. According to the report, revolving credit -- a loan category comprised almost entirely of credit card debt -- fell at an annualized rate of 11.0 percent in April, coming on the heels of a 11.2 percent fall in March. Overall, revolving debt fell to $931.0 billion from a total of $939.6 billion in March.

Additionally, February's revised 13.94 percent decline in revolving debt is the largest since the 15.72 percent fall in January 1978.

The seven consecutive monthly declines in revolving credit from October 2008 to April 2009 represent the longest pullback on record since the report began in January 1968, according to the Fed.

Meanwhile, nonrevolving credit fell 5.3 percent in April to $1.593 trillion. That section of the consumer credit report includes a variety of types of lending, primarily auto loans, student loans and loans for mobile homes, boats and trailers.

Taken as a whole, consumer debt totaled $2.524 trillion in April, compared with $2.540 trillion in March.

Consumers hesitant to use plastic, experts say
According to experts, card balances are declining as consumers remain hesitant to make additional charges and card issuers assist by cutting available credit. "The trend is certainly toward having less revolving consumer credit outstanding," says Cynthia Ullrich, senior director at Fitch Ratings in New York.

"I believe that consumers are spending less on their credit cards," Ullrich says.

Recent data support that stance. Despite personal incomes that got a boost from government stimulus and tax breaks, personal consumption dipped 0.1 percent in April. That combination of greater incomes and lower expenditures lifted the savings rate to a 14-year high of 5.7 percent in April, up from 4.5 percent in March. Analysts say that has prompted a drop in the consumer credit numbers. "The household sector has been deleveraging pretty aggressively and the savings rate has been rising," says Joseph Lupton, senior economist with JP Morgan Chase.

We have not seen an increase in the monthly payment rate which would indicate that people are paying off their credit card debt faster than they have in the past.

-- Cynthia Ullrich Fitch Ratings

Even as consumers put money into savings, the ongoing decline in revolving credit appears to stem primarily from a pullback in card use rather than aggressive effort to pay down balances. "We have not seen an increase in the monthly payment rate, which would indicate that people are paying off their credit card debt faster than they have in the past," says Ullrich.

Cardholders will likely continue to make fewer charges relative to their earnings. Lupton predicts further declines in the ratio of card expenditures to consumer incomes. He explains that outstanding consumer credit (revolving and nonrevolving) as a share of personal disposable income peaked at around 25 percent during 2003, but has since trended back down to 23.6 percent as of March. That ratio could narrow further. "It wouldn't be surprising to see it move down to something like 20 percent, which is more on par with what we saw last decade, in the '90s," he says. According to Lupton, that would suggest an additional 10 percent decline from March's total of $2.55 trillion in total consumer credit, marking by far the largest decline in the post-World War II era.

Card use curtailed as job losses, energy prices head higher
Meanwhile, rising unemployment and gas prices could spell further reductions in card use. The May employment report, released today, showed that even as job losses slowed last month, the unemployment rate advanced to 9.4 percent, setting a new 25-year high.

Cardholders may remain hesitant. In testimony earlier this week, Federal Reserve Chairman Ben Bernanke warned that although household spending will benefit from the fiscal stimulus program, "a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions." That means less spending on plastic.

(A) number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions.

-- Ben Bernanke Federal Reserve chairman

Bernanke also sounded a cautious note on the employment sector, as "businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes." Although rising unemployment could force some households to increasingly rely on plastic to cover expenses, experts say that any uptick in revolving credit should be offset by the build up of precautionary savings -- leading to a net decrease in revolving credit. "You've already seen consumer credit move down and this is in an environment where the shocks have been enormous," Lupton says.

Additionally, rising energy prices could also limit spending on credit cards. Gains over the past several months in the price of crude oil have meant higher prices at the pump. As consumers spend more to fill up their vehicles, they have less cash to spend on other purchases. "The next few months, you're going to start to see household spending impacted by this hit to their purchasing power," Lupton says. Still, the effect of higher gas prices may be somewhat offset by fiscal stimulus, which would enable consumers to increasingly deleverage -- scale back their debt. "How that plays out is going to be an open question. Our hope is to see consumer spending stabilize over the summer," Lupton says.

Lower card balances could lead to pop in charge-offs
Regardless of consumer spending, banks will likely feel further losses. The latest data from Fitch Ratings' credit card index showed credit card delinquencies fell month-over-month in May for the first time this year, although charge-offs reached a new record high. "We're hopeful that it's a trend that delinquencies are abating and that we'll see lower charge-offs in the future," says Fitch's Ullrich. Late payments, recorded as delinquencies, become charge-offs when banks decide the outstanding debt is not collectible.

Despite hopes for an improved picture, charge-offs could actually increase further as revolving balances come down. As cardholders avoid adding to outstanding credit card balances, the percentage of charge-offs could rise in coming months. "You still have the same dollar amount of charge-offs, but compared to the amount outstanding, it looks worse," Ullrich says.

Credit card debt negotiation in 3 (not) easy steps

You can still dicker over debt, but it's a marathon, not a sprint

By Dana Dratch

You're drowning financially and need some serious help with the credit card bills. Besides bankruptcy, is there another option?

Yes. It is possible to contact a card bank and negotiate a partial settlement, a workout agreement, or even just a reduction in the bills for a few months. But getting the deal you need won't necessarily be a slam dunk.

"It's not easy," says Ira Rheingold, executive director of the National Association of Consumer Advocates.

Not only are you facing a series of phone calls, you also have to wrestle with details that might not seem important now, such as the impact to your credit and next year's tax bill.

There are only three steps to renegotiating debt, but they're looooooong ones.

Step 1: What solution will work?
Determine what kind of arrangement would work best for you. There are four chief ones: lump-sum settlement, workout arrangement, debt management plan and forbearance. Here's how each works:

• Lump-sum settlement. If you have access to a chunk of money, you can try to negotiate a settlement for less than the full amount owed. Frequently, you can break the sum into three payments.

  What you need to know: This impacts your credit score equal to a charge-off, says Barry Paperno, consumer operations manager for FICO, the company that pioneered credit scoring.

  If you're negotiating for a lump-sum settlement, be clear that this will be the total amount to satisfy the bill.

• Workout arrangement. Under a workout, the bank eliminates or lowers your interest rate and often stops assessing punitive fees (such as late fees or over-limit charges). The terms of the program may be temporary (to help you get back on your feet) or permanent (until you've paid the entire balance).

  What you need to know: Your credit line will likely be cut, so you can't use the card. You can also ask the company to forgive past punitive fees to further reduce your balance (which it may or may not do). The impact to your credit score will depend on how the issuer reports the arrangement or your payments to the credit bureaus. Also, if your credit line is cut, that will ding your score unless you're already maxed out. If the company reports that you're making full, timely payments, however, that will help your credit score and history.

• Debt management program. If you don't want to negotiate with the company directly and you need help with all of your credit cards, you can opt to go through a debt management program. Best bet: an agency affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. A counselor will meet with you and make arrangements with all your creditors on your behalf.

  What you need to know: All your card accounts will be included in the program and closed. While being in a debt management program by itself won't hurt your credit, shutting down accounts is likely to hurt your score -- unless all are maxed out anyway -- because you're harming your credit utilization ratio, a key component of credit scores. Still, it's a smarter, more score-friendly option than bankruptcy.

  When it comes to the counseling, "quality can vary around the country," says Chris Farrell, economic editor of the radio show "Marketplace Money" broadcast on National Public Radio "But they're honest."

  Steer clear of for-profit debt settlement companies, consumer advocates say, and beware of nonprofits that are really for-profits in disguise. "A nonprofit shouldn't be charging you anything until it's settled," says Ira Rheingold, executive director of the National Association of Consumer Advocates.

  Typical cost of a debt management plan through an accredited agency: $30 one-time setup fee, and $15 per month while you're on the plan. Plus, they don't turn you away if you can't pay. In addition, as the recession deepened, the top credit card issuers have become more generous in their debt management plans.

• A forbearance program, which offers breathing room for a few months while you get back on your feet.
  
  What you need to know: You will still pay every penny you borrowed, and possibly more. Forbearance programs offer a brief break from full payments, not forgiveness of any debt.

Step 2: Examine your debt, income
Then examine the debt itself. Ask the company for a breakdown of your bill, says Rheingold. "How much of it is garbage fees? How much did I blow, as opposed to late fees, over-limit fees, etc.?" says Rheingold. Once you separate it out, "you'll be shocked," he says.

If you had a credit limit of $3,000 but have a balance of $5,000 with interest and late fees, "you may be able to go back to the principal and get a reduction if you pay it off," says Rick McElvaney, program director for the Center for Consumer Law at the University of Houston Law Center. "It's all up to the individual creditor."

One of the reasons people get into trouble is they cut it too close. Unexpected things happen and you need to plan.

-- Travis Plunkett Consumer Federation of America

Take a look at your income as well, and know how much you can pay. "Do a budget," says McElvaney. "Know what you can afford. Don't overextend yourself.

"You should eat and pay your mortgage before you pay your credit card bills," he says.

When you examine your spending needs, build in some wiggle room. "One of the reasons people get into trouble is they cut it too close," says Travis Plunkett, legislative director for the Consumer Federation of America. "Unexpected things happen and you need to plan."

Step 3: Call the company, negotiate
Now you're ready to call your card company. Repeatedly.

"It's not easy to get the right person to get a settlement on your own that takes care of all the problems," says Rheingold.

"Start by phone," says Larry B. Feinstein, partner with Seattle-based Vortman & Feinstein, and co-chairman of the bankruptcy committee of the general practice division of the American Bar Association. "They won't answer a letter."

Customer service representatives who answer the phone likely will not have the authority to grant what you need, even if they won't admit it. State that you need the department that handles settlement arrangements, or workout arrangements.

"Ask for a credit manager upstream," says McElvaney. "Someone with the authority to make this deal."

Every card and bank is set up differently, with different policies, department names and special programs. Some department names to try: in-house help program, workout program or loss mitigation.

"You want to deal with people who are built to do these workouts, as opposed to a debt collector," says Rheingold.

Once you get that person on the line, get the person's name, ID number (if there is one) and telephone number with extension. Then explain what you need. When you finish the call, jot down a brief summary of the conversation with the date and time. Keep all of this in a notebook with whatever correspondence you get from the company.

"Be upfront," says Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling. Say: "You know I want to pay you. What can we do?"

This will likely be a marathon, not a sprint. Expect to make multiple phone calls and talk to a string of people, who may contradict each other.

When to call?
Common wisdom says you call as soon as you realize you have a problem.

But that can lead to a classic "Catch-22 situation," says Plunkett. Card issuers are "loathe to offer help until you show trouble," he says. That makes it difficult for proactive consumers who have missed one or no payments.

That means you may have to keep this telephone campaign going for several months. If you're missing payments, that will damage your credit.

With many card banks, the unpaid debt often moves to a delinquency department after 90 days, says Robert Manning, author of "Credit Card Nation." What it can mean to a consumer who has been trying to negotiate: a fresh chance to try again.

And many card companies are trying to help consumers do just that, even before the account is three-months past due, says Manning.

After 180 days, the company removes unpaid debt from the books, he says -- a "charge-off." To recoup those losses, the company could retain the debt and pursue legal action. Or it could sell the debt, generally for around 3 to 11 cents on the dollar, and take a loss on the rest, which would allow a 35 percent tax benefit, says Manning.

Typically, between 91 and 179 days, "the clock is ticking, from the lender's point of view," says Manning. They want to get paid, but their time to collect or relinquish the debt is evaporating, he says. "During this time the account is transferred to the delinquency division, which is motivated to make a deal before being forced to write off the debt," says Manning. So this is one more window the consumer can use to try and deal.

Could a lender sue before the six-month charge-off window? Technically, yes, says Manning. But, "due to an abysmal housing market, creditors realize that litigation expenses are rising while yields are falling, which is why they are taking the unprecedented policy of trying to negotiate with clients as soon as possible -- as early as 61 days," he says.

What they may not tell you
Debt negotiation is not a leap into a bed of rose petals. Recognize that:

• Things can get worse before they get better. After your initial contact, the card company can (and probably will) freeze your credit limit. Unless you're already maxed out, that could lower your credit score. It could also to the maximum.
• Debt forgiveness can have tax consequences. Tax law considers most . If a lender forgives more than $600 worth of the principal on your debt, it will report the amount to the IRS via a 1099-C form. If a card issuer lets you make a lump-sum payment -- for example, a $2,500 payment to settle a $4,500 credit card bill -- you'll likely have to pay tax on an additional $2,000 in income next year. If the bank forgives fees or interest, or lowers your interest rate, "there are no tax consequences there," says Barbara Weltman, attorney and author of "J.K. Lasser's Guide for Tough Times."
• A settlement could hurt your credit. Before you accept a deal, ask exactly how your arrangement will be reported to the credit bureaus. If the bank is forgiving actual debt (charges), that could be considered a partial settlement. While a settlement satisfies the obligation (you don't owe anymore), the impact to your credit score is the same as a bankruptcy or walking away from your debt, says FICO's Paperno.

With a workout arrangement, where you're paying the balance over time, the effect on your credit depends on how the company reports the arrangement to the bureaus, says Paperno. What you want to avoid: any mention of "partial payments," which can severely damage your score.

Your goal, as far as your credit: that any workout payments you make will be reported as current, complete and timely.


This part of the negotiation can sometimes get really frustrating. "A lot of the creditors refuse to deal with that issue," McElvaney says. "They just will do what they want to do."

Don't accept the first offer. You don't do that when you buy a car. You don't do that when you buy a house. Why do that here?

-- Gail Cunningham National Foundation for Credit Counseling

When you deal
Chances are, there's some life event that happened to bring you to this point: job loss, medical bills, car needing major repairs, divorce or the brother-in-law sleeping on your couch.

Sum up the situation. Explain that your financial picture has changed, but you still want to honor your commitment. Either ask what they can offer or propose your own plan. You may hear yes, no or be referred to another department.

One approach worth exploring: "If you can't cut my payments by X amount, I'm not going to be able to pay my bill," Plunkett says. Or, even better, focus on getting a better annual percentage rate (APR), which will automatically lower your payments and shift more of your payment to the balance.

With any type of agreement, don't be afraid to haggle. "I want the consumer to say loud and clear that they need to negotiate," says Cunningham. "Don't accept the first offer. You don't do that when you buy a car. You don't do that when you buy a house. Why do that here?"

Dare you mention the B-word -- bankruptcy? Yes, says Rheingold. "If it's something you're considering, it's something you should say to them."

You need your arrangement in writing
At last. You've cut a deal. But you're not quite done. Banks merge, people change jobs and the rep who noted your account or made promises over the phone could be long gone when you find out your satisfied account has been sold to a third-party or incorrectly reported to the credit bureaus.

Your protection: an agreement that puts everything in writing, from the fact that the account was (or will be) paid and when, to the tax reporting (called a 1099-C), to what the bank or card company will tell the credit bureaus.

Whatever arrangement you make, get it in writing before you pay, says Manning.

2009 Ferrari California Arrives In Australia, Deliveries Begin

THE FERRARI CALIFORNIA was always going to be a popular car, there’s no doubt about that. Nary a month after it was unveiled, word travelled that the entire world’s allocation for 2009 and 2010 had been snapped up, and little wonder.

The California represents a number of firsts for Ferrari. It’s the first front-engined V8 to hail from Maranello, the first hard-top convertible to wear the prancing horse badge, the first Ferrari to use a dual-clutch gearbox and also the first to be powered by a direct-injected engine.

With the entire world’s richest and most famous clamouring to get their butts into a California, it’s remarkable that the first Australian deliveries for the car will commence this month.

As to its positioning in the Ferrari lineup, General Manager for Ferrari in Australia and New Zealand, Ken Wall, says the California breaks new ground and expands the marque’s range.

“The Ferrari California does not extend the Ferrari range up or down the market,” Mr Wall said.

“Rather, it broadens the appeal of Ferrari within its existing price sector.

“Thus Ferrari now has two aggressive sports cars, the 599 GTB Fiorano and the F430, complimented respectively by two grand touring cars, the 612 Scaglietti and, now, the Ferrari California.”

The Ferrari California is on sale now with a retail price of $472,000 (before on-road costs). If you’re thinking about bagging a California of your own, you’d better do so quicksmart.

With a waiting list that long, odds are it’ll be quite some time before you’ll see one in your driveway.

BMW Developing Medical Emergency-Detecting Anti-Crash System

IT HAPPENS with startling frequency: a driver is motoring along when all of a sudden they are incapacited by a medical problem.

Heart attacks, strokes, fits and other severe medical emergencies can and do happen when driving - affecting both the young and old - and while the event in itself can be tragic, it can also turn the car into an unguided missile.

To combat the problem, BMW has announced that it will be developing a system that detects when drivers are in distress or have lost consciousness.

If an emergency is detected, the system will turn on the hazard lights, gently steer the car to the edge of the road (while avoiding surrounding traffic), come to a stop and alert the police and ambulance to the problem.

Called the ‘Emergency Stop Assistant’, the technology is being developed to work on freeway environments that allow the various on-board anti-collision radar systems to work at their best.

“In order to keep a limit on the variety of possible driving situations, which vary infinitely in complexity, we are developing the prototype of our Emergency Stop Assistant initially for use on motorways and sections of roads resembling motorways,” said Ralf Decke from BMW Group’s Research and Technology division.

The Emergency Stop Assistant utilises data from the vehicle’s lane departure warning system, active cruise control system and various radar sensors to safely guide a (essentially driver-less) vehicle to safety.

An introduction date for the technology is still some distance away.