Monday, May 25, 2009

THE ECONOMIC DOWNTURN IS FORCING AMERICANS TO SAVE FOR A RAINY DAY

Some long-lasting good may come from the recession’s impact on the American wallet.

The economic downturn may have put a cloud over the American Dream of homeownership, but it is forcing families to return to a culture of thrift that some economists say may well last long after the recovery, consumer experts say.

Worried about potential job loss and wringing their hands about falling home prices and stock market declines, Americans are saving more money. Savings rates have inched up to more than 4 percent of after-tax income in early 2009 from practically zero.

In 2005, during the peak of the last boom, the savings rate was a negative 2.7 percent. That means the average American gleefully spent more than he or she earned, while the Chinese save about a quarter of what they earn. Savings rates have fluctuated widely over the past 30 years, peaking at 14 percent in the turbulent 1970s, and remained in double digits into the 1980s.

Because consumer spending makes up about 70 percent of the nation’s gross domestic product, economists say the big question is: What will happen if people don’t start spending again after President Obama’s Stimulus ends?

The hardships of the Great Depression forced Americans to reevaluate financial values for decades. Will we awaken to the virtue of thrift?

Experts say easy consumer credit is one of the major pitfalls that sank the average American into debt.

According to the Consumer Federation of American (CFA), the traps and tricks that credit-card companies use to increase their profits are causing credit card balances for many families to balloon out of control, pushing them towards financial catastrophe.

Americans now carry a whopping $850 billion in credit-card debt, which represents an average debt of over $17,000 for the approximately 50 million households that do not pay their credit card balances in full every month.

The number of families that are behind in paying their credit card bills—a sign of serious financial problems to come—is now approaching the highest level on record, the CFA reports.

Now, Congress soon may enact legislation to prevent credit-card abuse. On May 19th, the U.S. Senate passed the Credit Cardholders’ Bill of Rights Act with huge bipartisan support by a vote of 90-5. The bill would curb some of the most arbitrary, abusive and unfair credit card lending practices that trap consumers in a vicious cycle of debt. Here are major provisions of the act:

• Unjustified and retroactive interest charges. Card companies could not hike interest rates retroactively on balances accrued before a rate increase takes effect (with minor exceptions) unless the cardholder is more than 60 days late in paying a bill.

If such interest rate increases occur, card issuers must lower the rate after six months of on-time payments following the increase. Card companies would not be able to raise interest rates in the first year after a card account is opened.

• Universal default on existing balances. Credit-card issuers could not increase a cardholder’s interest rate on existing balances based on adverse information not related to card behavior.

• Excessive and growing penalty fees. Penalty fees would have to be reasonable and proportional to the late or over-limit violation. Card issuers could not charge over-limit fees unless the cardholder has affirmatively agreed to allow over-limit transactions.

• Deceptive and costly payment application methods. Card companies would have to apply payments in excess of the minimum amount to the credit card balance with the highest rate of interest.

• Unfair billing practices. Card companies could not use “double-cycle” billing or impose interest charges on any portion of a balance that is paid by the due date.

• Abuse of young consumers. Credit-card issuers could not irresponsibly extend aggressive credit to consumers under the age of 21 who do not have the ability to repay debt. The young person would have to have an independent means to repay the loan, or there must be a cosigner who has such ability. Consumers under the age of 21 could choose whether to receive credit-card solicitations.

Enactment of this legislation is particularly timely as large credit-card companies have unjustly raised their rates recently, affecting millions of Americans, the CFA reported.

Many consumers are very angry that the banks they have been supporting with their tax dollars have rewarded that assistance by continuing to use a variety of abusive practices to overcharge them, the CFA said.