The ongoing subprime meltdown is merely the first destructive wave of credit catastrophe to wash over Wall Street, according to Slate’s resident explainer. Americans drunkenly bandy credit around in several forms: mortgages are the most prevalent loans turning sour, but credit card debt, student loans, and auto loans are silently conspiring to threaten our macroeconomic well-being.
Other types of consumer debt, which have nothing to do with housing and nothing to do with subprime, are going bad, too. The Wall Street Journal reported today that “about 4.5% of auto loans made in 2006 to top-rated borrowers were at least 30 days delinquent as of the end of September, up from 2.9% the previous month, according to a Lehman Brothers survey of companies servicing these loans.” In October, Fortune’s Peter Gumble warned that a similar plague may soon afflict credit-card companies. In October, credit-card giant Capital One Financial reported that the delinquency rate on credit cards for the third quarter of 2007 was 4.46 percent, up from 3.53 percent in the third quarter of 2006. “Given current loan growth and delinquency trends,” Capital One reported, it “expects the U.S. Card charge-off rate to be around 5.25 percent in the fourth quarter.”
The stock of First Marblehead, which has enjoyed explosive growth making private (i.e., not federally guaranteed) student loans, has been hammered in recent days because Moody’s, the ratings agency, concluded that loans it had made “appear to be defaulting at a significantly higher rate compared to loans originated through school financial aid offices.” The Wall Street Journal reported that “seventeen months after First Marblehead arranged one 2005 package of student loans, 2% had defaulted, according to the company’s monthly reports to note holders. But last month, a comparable 2006 package–also 17 months after issue–had a default rate of 3.98%.”
So what does all this mean to you? The imploding subprime market is already driving up the price of consumer credit—loans of all stripes are more expensive—but things could potentially get much worse. Somewhere between “manageable bad” and “let’s all walk to California and write about the Dust Bowl” bad. If we had the means, we’d come up with catchy colored Livestrong-y “My Debt Is Under Control!” tchotchkes. But since we don’t, we’ll simply beg: please use your credit responsibly.
Debt Be Not Proud [Slate]
FURTHER READING: The Grapes Of Wrath [Amazon]
(Photo: Wikipedia)
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@HRHKingFriday:
The credit and insurance debate was on topic. Sort of. Well, it’s the other guys fault for taking it off topic. Bah.
Yes we stretched staying on topic somewhat but our (non vulgar) debate is just one example of how the entire bank and credit scoring system is screwed up. We all had a lot of good points / opinions that is what the comments is for.Thank God for free speech.
@Pylon83: I agree with you this time
@Pylon83: About snarksnake that is
Hmmm…maybe greed isn’t so good after all…
@timmus: California.
I have to agree with many of the posts here. I pay cash for everything and don’t own credit cards. Why should I pay 25% of my income to live beyond my means and get into financial hell? My credit report is neither good or bad; it’s 100% clean. I still recently financed a car. I work for a mortgage company and I would estimate that 50% of the people have credit collections on their credit report. The percentage is even higher for medical collections. It seems that doctors send the bills to collections after thirty days. Beware-old debts keep getting sold time after time even though they might be legally noncollectable. It doesn’t matter to these leaches; they will still hound you to death.
@Pylon83: My husband does some collections work for a local hospital (he’s an attorney). Very rarely do they deal with people who ignored the bills. They mostly deal with people who’ve been desperately trying to pay the bills or work out a payment plan, but who simply can’t manage $60,000 in bills on $30,000 a year with one adult not working because of cancer.
@azntg: It’s ironic that during colonial times people were sent here to debtor’s prison, and today many Americans remain shackled to debt, often through their own poor choices.
Hopefully I’ll be clear of my credit card debt in six months, and then I can build up my retirement fund and tackle my student loans. My credit card debt comes from stupid, short-sighted choices, but my student loans were definitely a career investment.
@ladycrumpet: I wonder if debtors prisons will ever make a come back. I understand that a lot of people have student loans, mortgages, medical bills, etc. But people being irresponsible with consumer debt is ruining the party for the rest of us. I guess it comes down to whether its more profitable for banks to continue lending and just keep you shackled figuratively, or to put you to work in a debtors prison.
Never forget that behind the credit crisis is a rising inability to pay for health care and college tuition. Health expenses are still the number one cause of financial difficulty in this country, leading people to borrow when they wouldn’t otherwise.
@HRHKingFriday: Couldn’t the garnishing of wages be looked at as a modern form of debtors’ prison?
@Bobg:
So true about the last part of your comment. I had a Mervyn’s CC back in the day when I was stupid about credit. Anyways the account was closed, mind you this was over 12 yrs. ago. I just got a bill in the mail for this debt (I had always thought that I had paid it off). Apparently I didn’t pay it off.
@Carey:
“Somewhere between “manageable bad” and “let’s all walk to California and write about the Dust Bowl” bad. If we had the means, we’d come up with catchy colored Livestrong-y “My Debt Is Under Control!” tchotchkes. But since we don’t, we’ll simply beg: please use your credit responsibly.”
This is exactly why the whole ‘good debt / bad debt’ argument is bunk. Its all bad. ‘Manageable’ debt quickly becomes unmanageable and thats when the house of cards starts falling. “My Debt Is Under Control!” tchotchkes? Maybe “My Debt Is Under Control! — For Now!” Mine says “FREEDOM”, as in debt freedom. This is not to be braggy, but simply to say that this game of justifying your debt because of low or no interest is not a plan – even for people with good credit, as we are seeing here. Proving once again, the FICO score is not a measure of success, not a measure of winning, not a measure of even financial responsibility. It is simply your past ability to pay payments on multiple fronts over a period of time.
*shrug* It’s not going to hurt me because I am doing everything I can to be frugal so I can pay off my credit card.
@timmus: Whew! It’s a good thing the whole U.S. consists of your town. We’re safe.