Credit Counseling Firm Warns Consumers of “Perfect Financial Storm” Conditions

Take Charge America Offers Insight on Today’s Market

PHOENIX, Ariz. (July 6, 2005)… As we enter the summer of 2005, consumers are facing what may be the most challenging financial time in recent history. Take Charge America, a leading credit counseling and debt management agency, explains the how recent legislation, combined with other market factors, is combining to create the “perfect financial storm.” The elements of the brewing tempest include:

1. A New Bankruptcy Law: Anyone who has seen a newspaper or listened to news in the last few months knows about the new bankruptcy bill. Effective October 17, hundreds of thousands of consumers who, prior to the legislation, would have walked away from a lot of debt, will instead be put on a starvation budget and told to repay that debt. Some will quit spending and emerge years later penniless and creditless - like the walking dead of the financial world. Others will fail and disappear from the world of the financially engaged. With no bank accounts, no credit cards and frequent job changes to avoid wage garnishment, they will become economic nomads. The point here is that these consumers got into trouble because they lacked either a thorough understanding of debt or the discipline needed to manage it --- or both. Without proper education and assistance, they aren’t likely to learn the skills to change the outcome in the future.
2. A New Rule on Credit Card Payments: A less known element is a recent decision from a national policy group that will increase minimum credit card payments from 2.5% of the outstanding balance to 4%. With the typical American family owing $8,400, that will increase the minimum payment from $210 to $336. With the average family saving almost nothing, that represents $126 a month that will not be spent on something else. If consumers are having trouble paying their bills now, this new policy may push them over the edge.
3. Energy Prices: Another factor effecting the financial picture for most Americans is the increase in the price of energy, especially gasoline. As this is being written, the price of gasoline is almost exactly 100% higher than it was 18 months ago. Natural gas and electricity prices are likely to increase as well. With the typical Arizonan commuting 30 to 40 minutes a day in a large, fuel inefficient vehicle and living in a fairly large, air conditioned home, the impact could easily be an extra $120 a month in utility expenses for a typical family.
4. ARM’s: Last year at this time, the mortgage industry was writing mortgage loans at a record pace. To get the lowest possible interest rate, some consumers chose the one-year adjustable rate mortgage (ARM) and many of them are coming up for renewal. Rates have not increased a great deal, but even a modest increase can easily add $100 to the monthly house payment. ARM rate increases are increasingly likely as prime interest rates slowly climb.
5. Increasing Consumer Prices: In addition to energy prices, many other costs have increased at alarming rates. In particular, higher education costs are up as much as $1,000 or more per year, depending on the institution, and housing costs are up for those who haven’t already purchased a home. In fact, it is difficult to think of many areas where costs have decreased, and items with decreases, such as large vehicles, computers and some luxury goods are far less likely to be purchased by consumers who already have financial issues.
6. Stagnant Wages: The greatly understated Consumer Price Index of the U.S. government shows inflation increasing at around 3.1% a year in 2005. Wages, on the other hand, increased only 2.1% in 2004. Not many consumers are breaking even.

Taking all these factors into consideration, a typical Arizona family is facing extra costs of nearly $500 a month and no significant increase, or even a loss in real wages. If the new bankruptcy legislation makes them no longer eligible for bankruptcy filing, the slippery slope starts to look a lot slipperier. It is doubtful they have a savings account. The SUV and pickup truck are worth less than the amount owed on them. If real estate values continue to increase (and that is a big “if”), there may be a chance for yet another home equity loan, putting off disaster a few months, but for many Arizonans, the winter of 2006 could be a time of great discontent.

The real disaster for business could come as consumers lose the ability to spend. With no cash and no credit, the buying spree could come to an end. And the recovery will be slow for these families as they pay off the mounds of debt accumulated.

Of course, other factors could soften the blow. The fed could keep interest rates low, holding down mortgage and credit card payments. The government could enact new programs putting even more money into circulation or limiting some costs. Inflation could come charging back, leading to higher wages thus making that debt seem less insurmountable...at least temporarily.

That’s the thing about predicting the perfect storm; it only happens if all the conditions are just right and that is almost impossible to predict. The best way to make it through the storm is to put all the precautions in place. For many, that means getting educated about debt and how to get it under control before it buries you permanently.

About Take Charge America
Founded in 1987, Take Charge America, Inc. (TCA) is a non-profit 501(c)(3) organization headquartered in Phoenix, AZ. TCA is committed to helping consumers gain control of their finances and offers a variety of services including education, budget and financial counseling, and when necessary, debt management.

TCA also serves as an effective resource for the general community. We help financially distressed consumers re-organize their finances and return hundreds of millions of dollars annually to financial institutions, professional service providers, and businesses of all sizes and descriptions that may otherwise have been lost to the economy in bankruptcy. TCA’s diversified programs are utilized by tens of thousands of families and single men and women throughout the United States each year. To learn more about TCA please call: 1-866-528-0588 or visit: www.takechargeamerica.org.