Credit Scores and your HELOC

While we really do not like the control that the credit scores have over people's lives. It is like mysterious black box that can affect almost every aspect of people's lives. The credit scores can affect how much you pay for everything, influence the home purchase or rental, even getting a job.

We have, in the past, hoped for some type of regulation for the credit score industry. Since different lenders can supply different standards for the same activity. Or people can have their credit score dinged through absolutely none of their own doing. And do not even get us started on the complexities of trying to fix something that is wrong with a credit score - it can easily become a full time job.

Now we see that you have to play HELOC games so as not to ding your credit score. Open your HELOC for 3 times the amount you plan to use or watch your credit score get hit. In this article titled Treat delicately before tapping HELOC - it could damage your credit from the Orlando Sentinel we see the complexities involved. Let's take a look -

I have heard from some of my sources who work for credit card companies that the federal government is requiring lenders and creditors to have cash on hand equal to, in some cases, 40 to 50 percent of the credit that has been extended in the form of available credit on a credit card, or a home equity line of credit (HELOC).

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For example, if you have a credit card that you haven't used in 12 months, the lender may close it or reduce the amount of total available credit. We're hearing from thousands of Americans who have had their home equity lines of credit reduced or closed. Not only does this make it difficult to access the credit you've so carefully preserved, but it will also tarnish your credit score.

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If you don't take money out of your credit line, you may be one of those who ends up having the credit limit cut and later regret that you didn't take the money out when you could. But taking a sizable amount of money without the means to pay back the funds can put you in a precarious situation.

Let's think about how this would play out: If you tap 80 to 90 percent of your line of credit, you will hurt your credit score at least a little. But if your credit line is cut substantially, that too might hurt your credit score, as you'll have less available credit.

Optimally, you'd never tap more than 25 to 30 percent of a line of credit ... Anything more than that could lower your score a little, depending on other factors in your credit history. But since you might actually need the cash, it's better to take it now rather than want it later and not be able to get it.

The credit score is a messy area - and it is probably getting messier with the economic downturn. It is in desperate need of standards and regulation. Having access credit but not using it could harm your credit. Use your credit - but get the amount available reduced also harms your credit score. Not having enough credit activity or history also affects your credit score. It all seems so counter intuitive. But that is the way credit scoring works.

FICO Score Concerns

With the credit drying up and lenders reducing the amount available some of the FICO procedures are causing problems for even the best of consumers. While the full FICO methodology is a proprietary secret, we do know that part of the calculations are based on the amount of credit used as a percent of the consumer's available credit. So when a lender arbitrarily halves your credit card limit a ding will be left on your credit score. And since most of the universe seems to revolve around the FICO score - from auto insurance to potential employment - a couple dings from lenders could create real life problems for many people. Today we find we are not alone in our FICO concerns with this post titled Freedom From FICO over at SavingAdvice.com. Lets take a look -

One of the benefits of a life without debt is (some) freedom from the gods at FICO. Because I don’t do debt, my FICO score is not as important to me as it is to some and that takes a lot of worry out of my life. I see many people freaking out about their FICO scores because they know they will need a loan in the near future.

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And it’s a good thing that I don’t worry about it too much. Just the other day, I got a notice from a credit card that they were lowering my limit. ... More and more credit cards are closing cards and lowering limits and even the debt free are not immune to the madness. My score will no doubt drop a few points in the coming months, and not because of actions I take. But I can live with it.

I know many people who are at their wits end because their scores are dropping through no fault of their own as credit lines are slashed and even eliminated. This practice dings the all important “utilization of debt” ratio that comprises a large part of a credit score. When you have lower credit limits and your outstanding debt creeps closer to the maximum, your score goes down. And it’s happening all over the country right now. Some people, desperate for a car loan or a home equity loan are being denied because their scores have dropped, even though they have done nothing to deserve it. It’s cause for concern if you require debt to get through life.

I don’t agree with FICO’s methods for determining a score and I don’t agree with the way a lot of insurance companies, employers, and others use the score to determine who gets what. It’s a flawed system that takes away the human element and places all the control on a computer algorithm that has no concern for you as a person, your special circumstances, or that the credit card companies jacked you around. But it’s the system that the world uses and, like it or not, they’ve managed to make it so that even those of us who don’t use debt have to concern ourselves with this score.

It does seem pretty scary how one company can have so much influence. And since the algorithms are trade secrets it can be even more worrisome. We hope they have layers and layers of securities in place - even from their own employees. One mad FICO employee doing some random havoc could ruin numerous people's lives. With great power comes great responsibility. Oh, that is not working out so well for our best and our brightest. Let's hope things are better in Minneapolis then on Wall Street.

Warren's Second Report

The Congressional Oversight Panel regarding the $700 billion bailout has a new video regarding their work. Earlier we discussed their first video that was an over-view regarding how the bailout program was working. Now Elizabeth Warren explains what they found out so far. Lets take a look -




But if you do not want oversight at all you will try to resist the little you have. At least we have Prof. Warren asking questions about our money.

Credit Cards and HELOCs - No Money Left

During the housing bubble people relied on credit to pay for everything. Why pay in cash when credit was better. Credit seemed to be never ending and with low rates and easy access one could live any lifestyle they wanted. When you used up the excess credit - just roll it up into a HELOC or ReFi and voila you have more available credit.

That was the life. But now it seems just the opposite is happening. With credit once readily available, now it seems to be drying up at every turn. And the fees, the FEES! Jumping so high on little warning that the fees alone are pushing people into trouble. This brings us to an article from the Asbury Park Press titled Changing credit-card terms are squeezing consumers. Lets take a look -

Aggressive rate increases on credit cards are threatening to push struggling consumers into financial ruin, accelerating home foreclosures and the nation's descent into recession.

The growing problem is reflected in cases such as that of Dennis Spaulding, of Corona, Calif. He bought two last-minute plane tickets for his father's funeral in 2006, a purchase that increased the amount of credit he was using and made him appear riskier to banks. The result: Banks raised the interest rates on four of his credit cards — to 24 percent and higher — doubling his monthly payments to about $2,000.

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Across the nation, a growing number of consumers and financial experts are complaining that sudden credit-card limit reductions and sharp interest rate increases are triggering a domino effect that makes it harder for consumers to juggle bills, stay in homes and avoid going broke. No official data are available on how many people are being pushed into financial distress by credit cards rather than mortgages. But credit counselors, bankruptcy lawyers and legislators say banks increasingly are pummeling consumers for making the smallest payment error — or making no error at all.

The shift comes as regulators and legislators have spent the last year pointing to toxic mortgages and overextended home buyers as the culprits behind the financial crisis. Credit cards, by encouraging a society of spenders rather than savers, have played a significant role in loading up consumers with unaffordable debt whose rates and terms can change at any time.

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USA TODAY, in previous articles in its "Credit Trap" series, has reported that during the housing boom, banks sharply raised card limits, in part, because of a surge in home equity, then guided borrowers to use mortgages to pay off card balances. The series also found that banks' practice of packaging and selling credit-card debt to Wall Street has given them a powerful incentive to raise card rates and fees.

Funny how the ones getting the help from the little guys (read the bailout) are not doing anything to return the favor. In fact, they are raising the rates and cutting access. But don't worry in 2010 - if nothing changes - the credit card industry will be facing some new regulations. Until then it is more of the same - socialize the loss and privatize the profit.

Socializing the Mortgage Industry

That is what Federal Reserve Chairman Ben Bernanke appears to be pushing. Apparently he is suggesting having government agencies buy up bad mortgages and refinance them with much more favorable terms or having the government subsidize private loans.

When privatizing fails then socialize. When socializing is working then privatize. That seems to be the way the system works - by default or by design is a debate for another time.

In this article from Investor News titled Bernanke outlines plans to stem foreclosures we can get a glimpse of the proposal. Lets take a look -

“Despite good-faith efforts by both the private and public sectors, the foreclosure rate remains too high, with adverse consequences for both those directly involved and for the broader economy,” [Bernanke] said at the Federal Reserve System Conference on Housing and Mortgage Markets.

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Calling the problems in the housing and mortgage markets “inextricably intertwined” with broader financial and economic developments, Mr. Bernanke listed a slew of “promising options” that are aimed to reduce avoidable foreclosures.

Under one proposal, Mr. Bernanke called on Congress to ease the terms of the government’s "Hope for Homeowners" plan, which allows lenders to refinance a delinquent borrower into a new, Federal Housing Authority-insured fixed-rate mortgage if the lender writes down the mortgage balance to create some home equity for the borrower.

In another proposal, he suggested that Congress lower lenders’ upfront insurance premiums and reduce the interest rate that borrowers pay, which is currently “quite high,” at roughly 8%.

To lower the interest rate, the Treasury could purchase securities issued by Ginnie Mae of Washington to fund the program, or Congress can subsidize the rate.

While these all may be great ideas, the first part of the solution is coming up with a coherent strategy. Throwing a bunch of money at something does not solve the problem - if you do not know what the problem. You have to know who to give the funds to and how. From our previous post on Elizabeth Warren's new position to oversee the bailout -

The government seemed to be lurching from one tactic to the next without clarifying how each step fits into an overall plan.

Yes, coming up with a plan, a coherent plan, is probably the most important step. Now we just need to give Ms. Warren veto and subpoena power.

There is a great video from Jon Stewart that sums up a huge part of the problem -

The Daily Show With Jon StewartM - Th 11p / 10c

Clusterf#@k to the Poor House - Bean on a Plate Edition

Barack Obama Interview
John McCain Interview

Sarah Palin Video
Funny Election Video

The whole video is good, but the part directly related to this post starts at about 4:30.

The goal is probably not to socialize the mortgage industry. But it has to be more specific than just "save the economy." Without a coherent strategy we are just cobbling together ideas, wasting money, and increasing the incompetence. And we are paying an incredibly high price in doing so.

Campbell Brown on The Bailout

The more one looks the less sense everything makes. Here is Campbell Brown's take on the bailout -




Like we said before, at least we have Elizabeth Warren looking over Paulson's shoulder. Now we just need to give her veto power!

First Find the Problem, Then Fix It

Things usually work better that way. Rather than trying to fix things before you actually realize what /where things are broken. Sounds pretty clever - right. Too clever for our Secretary of the Treasury.

This very interesting and informative article from the New York Times titled Bailout Monitor Sees Lack of a Coherent Plan gives us a view into what the bailout really is doing. And what the monitor - who happens to be the brilliant Elizabeth Warren - finds is that are just making things up as they go along. Pretty scary when you realize that these are the people "trying" to prevent an all-out economic collapse. Lets take a look -

The head of a new Congressional panel set up to monitor the gigantic federal bailout says the government still does not seem to have a coherent strategy for easing the financial crisis, despite the billions it has already spent in that effort.

Elizabeth Warren, the chairwoman of the oversight panel, said in an interview Monday that the government instead seemed to be lurching from one tactic to the next without clarifying how each step fits into an overall plan.

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“Our objectives in asking Congress for a financial rescue package were to first stabilize a financial system on the verge of collapse, and then to get lending going again to support the American people and businesses,” Mr. Paulson said at one recent hearing. “If the financial system were to collapse, it would significantly worsen and prolong the economic downturn.”

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The panel’s power, as sketched out in the law, extends a bit beyond the “bully pulpit” but falls far short of a veto over specific proposals or programs. Its main source of influence is that it will have the ear of lawmakers who can tighten the bailout purse-strings or rewrite its charter.

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Meetings with Treasury officials so far have made her question whether they understand that “household financial health is profoundly tied to the economic health of the nation,” she said. “You cannot repair this economy if you can’t repair those families, and I’m not sure the people directing the bailout see that as their job.”

If you thought they were making it up as they go along - you were right! If you thought Paulson was just giving the money to his friends - it looks like you are right! Remember, Paulson's original plan called for no, No, NO oversight!!! We can see why that was proposed!

This is a great article. We are also given some hope that Ms. Warren will be looking over Paulson's shoulder.

Like Falling of a Cliff

We know that retail sales are down, way down. But looking at the following graph shows how bad things really are. Remember the growth was fueled by the ever-rising equity. Just trade that equity for consumption. It only appeared to go one way. All homeowners had wealth. If you were 100% financed - just wait a few months and you had equity. And that equity could work for you by providing the goods and services you deserved.

Canada Vs. U.S. Total Retail Sales

This graph was in an article titled Consumer spending in the U.S. takes a tumble, Canada set for a fall from the Daily Commercial News. Here are a few snippets -

The graph [above] shows how closely aligned are retail sales in the United States and Canada. Year-over-year retail sales in both countries can vary to some degree over short periods of time, but the trends rarely differ for very long or to any significant degree of magnitude. This is not good news for Canada since U.S. retail sales have been announced for a period two months in advance of Canada’s and they are sinking into a deep pit.

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It should also be added that consumer spending - for which retail trade is a leading indicator - accounts for approximately 70% of Gross Domestic Product (GDP) in the U.S. and 55% in Canada. The lower figure for Canada is due primarily to the greater importance of foreign trade in national output.

U.S. retail trade numbers were already trending down before September. But over the last two months, the decline has been dizzying. Since the start of this year, the U.S. economy has jettisoned 1.2 million jobs. Companies in a variety of sectors are announcing layoffs.

The financial crisis that saw credit dry up has meant that consumers have hunkered down to an extent not seen in many years. Plus existing home price declines have further hurt confidence and removed home equity as a financing option. Stock market price declines have been the final straw, cutting into savings through mutual fund and pension fund accounts.

At the start of the downturn there was a belief that the global trading would deter a significant U.S. fall. Rather than preventing a fall, it seems that the U.S. is taking everyone else with us.

Drinking the Kool Aid

When someone completely buys into an idea it is often referred to as drinking the kool aid. During the housing bubble there were a couple different flavors of kool aid - the house values only increase, the withdraw all the equity, and the ever popular debt is wealth flavor. While none of them make sense now the were very popular at the time. MarketWatch has an interesting post up titled We have met the enemy and he is us that sums up some of the most interesting excesses (kool aid flavors) from the Great Housing Bubble. Here is our 5 favorites from the bullet list -

• If it sounds too good to be true, it probably is. Turning to homebuyers, many people bought more house than they could afford, thanks to adjustable interest rates that were expected to remain low indefinitely.

• What goes up must come down. These people also believed that rising home prices would enable them to pull equity out of their homes, while refinancing into a fixed rate. But as we now know, nothing rises forever.

• Home is where the heart is. Forgetting that a home is first and foremost a place to live, many people began thinking of their houses as investments and as piggy banks, and thus made decisions that they might not otherwise have made. Even to this day, some homeowners think it is wrong to owe more on their mortgage than their house is worth; that's why they walk away from it. Hello? Don't they realize that they need a place to live?

• What, me worry? Home prices have gone up every year since the Great Depression, so it's OK for me to spend more than I earn, since all I have to do to make up the difference is to take out a home-equity loan.

• This time it's different. There may have been bubbles in the past, but it can't happen to housing, since all real estate is local and, at any rate, people need a place to live (See Home is where the heart is, above).

Looking back it is hard to believe so many people bought into it. One that did not make the list was to jump in now (now being 2005-2006) while you still can. Prices were going to keep rising at double digit rates indefinitely. The fundamentals were strong. The economy could handle this. Besides there is global trade now so a little bump caused by the US housing down turn would not have much of an impact.

What flavors are we drinking now?

Living with Debt

In recent years there was a drastic change in personal economic thought - once upon a time debt was frowned upon. However recently debt was equated with wealth. As long as one had a new car, granite countertops and a coach bag it did not matter if one could afford it. Whether the procurement was done through debt or cash in hand was irrelevant. And due to easy access to equity it was even easier. Once people had run up their credit cards they often just threw the debt into their home equity lines.

Now that property values have plummeted people have to change their ways. Credit card debt is still increasing but the ability to convert it into equity debt has abruptly stopped. This issue is examined in this article from the Washington Post titled Banks hoards cash as credit card defaults rise. We can see that the debt problems have been continually increasing. Lets take a look -

The deterioration in consumer credit, the latest downturn to whack Americans after the housing slump and mortgage meltdown, threatens one of the linchpins of the U.S. economy. Over the past 10 years, credit card debt has gone up 75 percent as Americans' real wages and savings rate have stayed flat. That means Americans have been spending beyond their means -- and fueling economic growth with borrowed money.

Now, the housing crash, financial downturn and contracting economy have made it more difficult for Americans to settle their bills, setting off a downward spiral. As people fail to pay off their credit card bills and other loans, banks must put away money to cover expected losses. So banks lend less. Americans who tended to rely on loans to fuel their spending must cut back, readjusting their spending habits to conform with what they earn.

"Given that the savings rate has been minuscule, there's no reserves in the tank for the consumer to tap his savings to support his spending," said Scott Valentin, a financial services analyst at Arlington investment bank Friedman Billings Ramsey. But consumers have been driving about two-thirds of the U.S. economy.

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A report this week from Innovest, a research firm, said banks and other credit card lenders could record nearly $100 billion in losses because of bad loans through the end of next year. Innovest said financial firms could be reaching a "tipping point" at which years of growth in credit card debt starts to decline.

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Credit card debt is especially worrisome for banks because it is not backed by real assets, such as home mortgages and auto loans. But that has meant credit card issuers routinely have been more cautious.

Which brings us to the Innovest report. First lets take a look at the savings rate Vs. debt Ratio the provide-

Our debt is significantly higher than our savings. This is not viable in the long term.

Now onto an Innovest graph that illustrates the huge divergence between credit card debt and real wages.


With a such a significant gap the money has to come from somewhere. And then lets compare the previous graph with one from Calculated Risk illustrating quarterly rise and fall of equity withdrawal.


These are some pretty frightening graphs depicting just how much we have been accustomed at living well beyond our means. Just living within our means will hurt. Our debt has become a great burden that will make any recession even harder. The fact that we do not have any savings to fall back on will make things even gloomier. The next few years are going to be pretty rough.

The Long Slump

It is interesting to read that the housing clump had just about bottomed. But then the credit crunch came and helped extend the housing slump. Now people realize that there will be more declines to come for a much longer time period than anyone wanted to originally admit. The downward spiral continues - less housing starts, less jobs. Less jobs, less potential buyers and more debts go unpaid. More debt going unpaid means more losses for lenders. More loss for lenders less money to lend. Less money to lend less housing starts. And so on, and so on. Bloomberg News has an article titled U.S. Housing Starts Probably Fell to 17-Year Low in September illustrates that the cycle will continue for some time. Here are some key parts of the article -

U.S. builders probably broke ground in September on the fewest houses in 17 years, a sign the real- estate market deteriorated even before the recent credit meltdown, economists said before a report today.

Housing starts fell 2.6 percent last month to an annual rate of 872,000, according to the median forecast in a Bloomberg News survey of 74 economists. Another report may show consumer sentiment fell in October for the first time in four months.

Builders will find it difficult to lure buyers into the market after stock prices plunged this month and banks made qualifying for a mortgage more difficult. Declines in construction are likely to continue to hurt economic growth well into 2009, extending the housing slump into a fourth year.

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The biggest housing slump in a generation was showing signs of nearing a bottom when financial markets began to implode in September, leading to the government takeover of mortgage finance companies Freddie Mac and Fannie Mae, the failure of banks and a $700 billion government rescue plan this month. Recent events are likely delaying any return to stability.

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Falling prices are contributing to the jump in foreclosures as Americans, trying to refinance adjustable-rate loans, find out they owe more than their homes are worth. The drop in prices also means owners can't tap home equity for extra cash, one reason behind the slowdown in consumer spending.

Everything is intertwined. It may take time for all the fallout to be understood by the masses, but it will. Money that people thought they had is gone. And jobs will disappear along with the money. The downward spiral will continue for sometime before it reaches bottom. Now the predictions are hoping for some time next year. Hopefully they are right!

Suze Speaks, We Listen

Financial Guru Suze Orman talks about the current economic problems to Oprah. The truth is biting and she says it all so simply. We will just cut to the chase and take a look at her words -

"We have built an entire economy on lies and deceit," she says. "It's like building a home or an entire building on a sinkhole. You have a foundation, supposedly. But a little crack, if something goes wrong -- a little earthquake, a tremor -- and it starts to open, everything starts to fall down and ... that is exactly what has happened in the United States of America."

Suze says the current financial downturn started all the way at the top of banks, mortgage companies and brokerage firms.

"There was greed at the top -- serious greed," Suze says. "When you have stocks, you have individual companies that want to make money. And [CEOs] want to make more money because the more money they make, the more their compensation is, the more their stock price goes up."

These companies made money by selling investments like mortgages to people who couldn't afford them, Suze says.

"Have you all ever wondered, 'Why does Suze Orman say people first, then money, then things?'" she says. "It means if we cared about people more than we cared about money, we would not be having what happened today, because the people who run the corporations, if they had cared about all of you, they wouldn't have created loans that you couldn't afford."

A lack of regulations also contributed to the downfall -- and Suze says there weren't more rules established because they would cut into the bottom line.

"The more money the brokerage firms, the mortgage companies and all those companies made, the better the economy was. Because if they lent you money, you had money now that you could spend," she says. "When the economy looks great, everybody feels like, 'Oh, we're doing good.' The stock market goes up. When the stock market goes up, the price of shares go up. The compensation for the CEOs go up."

As things progressed, Suze says many people fell under Wall Street's spell.

"A lot of you have built your personal financial foundation on deceit and lies. You bought a home that you couldn't afford ... You spent money like it was going out of style and it wasn't your money to spend, because why? They were borrowing it," Suze says. "When you borrow money, you leverage yourself. The United States of America leveraged itself so high that when it started to come down, the whole thing now has fallen down."

Wow - the truth does hurt.

More Lower Mortgage Rate Promises

The economy is in really, really rough shape. An international round of rate cuts headed the news cycle yesterday. Desperate for a silver lining to decrease one's anxiety with opening their 401K envelopes we are hearing about how mortgage rates will hopefully be lower. Yippee! Collectively we have lost $2 trillion but mortgage rates are lower. Yippee!

Even though most who need to can not refinance due to being underwater or have too many other credit problems to qualify rates are (hopefully) going down. Bloomberg explains the issue in this article titled Lower Mortgage Rates May Be Silver Lining in Turmoil. Lets take a look -

A nationwide survey of consumer credit rates showed 30-year fixed-rate mortgages averaged 5.8 percent yesterday, according to Bankrate.com. Rates were 6.26 percent on Aug. 29 and also July 31, in the same survey. Home-loan applications rose 2.2 percent last week, according to the Mortgage Bankers Association and purchases were at a six-year low the previous week.

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Rates aren't as low as earlier in the year. The average 30- year fixed-rate mortgage was 5.5 percent in January, a three- year low. At yesterday's rate of 5.8 percent, monthly borrowing costs for each $100,000 of a loan would be about $587, up $19 from January.

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With credit tightening, consumers should think twice about making any extra payments on their mortgages in the short term, said Gibran Nicholas, chairman of the CMPS Institute in Ann Arbor, Michigan, a group that certifies mortgage bankers and brokers.

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Your home-equity line ``isn't guaranteed,'' Nicholas said. ``The safer thing to do is to move money to a place where you can control it.''

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Major mortgage lenders including New York-based JPMorgan Chase & Co., Citigroup Inc. and Cleveland-based National City Corp. have reined in home-equity lines of credit even to customers in good standing. Banks are looking at factors outside an individual's control, such as a weakening local economy or declining area home prices.

Notice all the positive advice about increasing and/or holding your debt steady. Have any HELOC left - take it and run. Is there any safe place to put it? Maybe gold. This may be good advice for the few who will not fritter it away - but most people will burn through the money just as they did during the housing bubble.

The advice seems to be aimed for those that generate their income through processing the paperwork. This almost sounds like another edition of "consider the source". Instead of trying to reduce debt and get in a safe position the encourage in the middle of mass uncertainty (and possibly a devastating credit crunch) is to load up on debt. Yeah, that makes sense. /sarcasm

Squeezing the Middle Class

Things are getting tighter. Less jobs and less access to credit already. Now we are told we just spent $840 billion on a bailout with add-ons. But this is probably the first request. Many analysts are saying it could easily be $2 trillion when things are said and done. So how is that affecting the average American? This article from McClatchy Newspapers service (found in the Idaho Statesman) titled Economists may not call it recession, but job stats say it is puts things into perspective. Lets take a look -

The combination of falling home equity, the rising cost of food, health care and housing, tighter credit and eight straight months of job losses — 84,000 in August alone — has put the squeeze on middle-class families struggling to stay afloat in a slumping economy.

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Even college graduates are feeling the pinch. Their 2.7 percent unemployment rate is the highest since 2004, while the 9.6 percent unemployment rate for workers without a high-school diploma is the highest since 1996.

Most of the August job losses were again in the manufacturing sector, which shed 61,000 positions, the most in five years. In the past seven years, 20 percent of manufacturing jobs have disappeared despite improving U.S. export numbers, said Scott Paul, executive director of the Alliance for American Manufacturing.

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Falling gasoline prices will help many families. But Ken Goldstein, an economist at the Conference Board in New York City, doesn't think that consumers dealing with rising inflation and health-care costs will notice much difference.

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Many companies already have cut employee health coverage or shifted more of the costs to covered workers through higher deductibles, co-pays and out-of-pocket spending. Currently, average annual worker contributions for single and family coverage are $694 and $3,281, respectively, according to the most recent data by the Kaiser Family Foundation.

Well we do know one business that seems to be looking up - unfortunately trash outs. As the economy tightens we will be seeing even more job losses in the service and retail sectors. More foreclosures.

Late Payments on the Rise

Late payments are at a rate not seen in 16 years - from the 1992 recession. That is prior to the large fall in jobs that we have seen in our previous post. This would indicate that the numbers regarding late payments will continue to rise - as will the sales across the board continue to slump. This article from Reuters titled Late US consumer loan payments hit 16 year high - ABA describes what is occurring. Lets take a look -

Late payments on U.S. consumer loans rose in the second quarter to their highest level in 16 years as more homeowners fell behind on their home equity loan payments amid the worsening housing slump, a banking industry group said on Friday.

The American Bankers Association said its quarterly composite index, which tracks late payments of 30 days or more for several types of loans, rose to 2.68 percent during the April-June period. It was 2.62 percent in the first quarter.

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The composite index was pushed higher by borrowers falling behind on fixed home equity loans, with late payments rising to 2.56 percent in the second quarter from 2.34 percent the previous quarter.

However, late payments on other consumer loans for autos, property improvement, boats, recreational vehicles, and mobile homes dropped in the second quarter from the first, the group said.

"The collision of falling home values, declining stock prices and rising every day expenses has severely dented the financial security of many people," American Bankers Association Chief Economist James Chessen said in a statement.

These numbers do not include credit card payments or open-ended HELOC lines. But with numbers like these, and the addition of a credit crunch, we will be heading into a very dismal holiday season.

A Thaw or a Deep Freeze

After the quick primer on what exactly the credit crunch means to the average person the next question how much pain it will generate.

We know that there has been a stealth credit crunch going on for months with the lock down on HELOCs. Now that credit crunch is moving on. In this article from the Star Ledger titled Thawing out the frozen credit markets the issues are explored. Lets take a look -

The term "frozen credit markets" simply means credit is frozen or very hard to get, even for people or businesses with terrific credit histories. For consumers, that could mean denials on car loans, the lowering of credit-card spending limits or an inability to get a mortgage or open a home-equity line of credit.

For small businesses, it could be the beginning of the end. Without available credit, some businesses won't be able to make payroll (which could mean layoffs), they won't have capital to stock their shelves and pay their suppliers.

"Credit is not a right. It's a privilege. You need to protect it," Adam Levin, chairman of credit.com and former New Jersey Consumer Affairs director, said yesterday. "In good times, it makes your life easier, and in bad times, it could prove to be your safety net."

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Taking money out now is a defensive move for consumers, because yes, your bank really could take away your credit line, even if you haven't done anything to become a greater credit risk. Levin says out of the blue, some institutions may want to review your finances. Based on the bank's analysis, it could lower your credit limit, maybe because your situation has changed, or maybe because the bank's lending standards have risen.

The free money wells are running dry. Credit (read as debt) was once so easy to obtain, and easy to get into over ones head, is getting harder and harder to get. But when you structure an economy to rely on debt these things can happen. When we encourage people to shop to relieve fear and frustrations things will happen. When we encourage this on a nationwide scale with absolutely no oversight and no realization that the bills will one day come due things will happen. Now we are just waiting to see how long and hard the freeze will be.

The Credit Crisis - What you need to know

Here is a cute video from ABC News regarding what the credit crunch is all about. This is especially helpful for those of us who have trouble with economics. In cartoon format -