- The Washington Times - Friday, April 10, 2009

Earlier this week, the Federal Reserve released its monthly G19, which is the monthly consumer credit report. At first blush, the report appeared positive as total consumer debt trended down in February compared with year-end 2008 levels. The downward trend was due entirely to declines of outstanding revolving consumer credit - such as credit cards - year to date, while outstanding nonrevolving credit - such as automobile loans, education, boats, and the like - has continued to climb.

The shift in consumer credit composition is not that shocking to me given rising unemployment rates, which is likely forcing people to restrict spending but also to retool themselves. By that I mean, heading back to school to improve their education or perhaps to prepare for a career shift. For example, there have been several stories in recent months about how more than a few former Wall Street people are looking to start new careers in very different fields.

Revolving debt, which accounts for 37 percent of total consumer credit, declined 0.6 percent, or $5.9 billion, year to date and stood at $955.7 billion at the end of February, according to the Federal Reserve. What I find interesting about revolving credit is how it has grown over the past few years from $799 billion in 2004 to $955.7 billion exiting in February.

While some of that “growth” can be attributed to a shift in how consumers pay for purchases (more credit vs. cash), it also reinforces the notion that at least a portion of the domestic population has been living beyond its means. According to the U.S. Census Bureau, the median household income in the United States in 2007 was $50,233. To put this in context, total consumer credit per individual age 20 to 64 years old, which is 60 percent of the domestic population, is $14,010 and the revolving credit per individual in that age range is $5,222.

With this as a backdrop amid the current economic situation - characterized by rising unemployment, reduced household wealth and restrained spending by a hesitant consumer - it comes as little surprise that people are wary of adding to their current debt load. On Thursday, data showed that total jobless claims reached a record high, and in aggregate the United States has lost 5.1 million jobs since late 2007. The greater issue is that more than 2 million of those job losses have occurred in the past few months.

One of the greater risks is that if this job-loss rate continues, what does it mean for a consumer-led recovery in the balance of 2009? Comments from the Federal Reserve minutes Thursday suggest that it is likely to get worse before it gets better - “strains on household balance sheets from falling equity and house prices, reduced credit availability and the fear of unemployment could well lead to further increases in the saving rate that would damp consumption growth in the near term.”

This gets even more precarious when I start to think about how long some people have been on unemployment benefits and what is looming ahead as those benefits are exhausted in the second half of the year.

There is no doubt that the economic downturn has hit households hard. Even the most fiscally conservative families can find themselves swimming in a sea of credit card debt, and those issuers are cutting back available credit and increasing rates as late payments grow.

Against this backdrop, a question to be asked is: What can people do to address their debt levels and/or make their debt service payments more manageable?

While there are several answers, one potential solution is to contact a credible debt settlement company and explore a debt settlement program. In general, a debt settlement company negotiates on the borrowers' behalf with creditors to reduce the overall debts in exchange for an agreement upon regular payments to be made. Not all types of debt are eligible, however. By and large only credit card debts can be handled - not student loans, auto financing or mortgages.

For people in debt, such a program can make obvious sense as they can potentially avoid bankruptcy, lower their debt balances and set up a more manageable payment plan. The creditor, meanwhile, is able to recapture some portion of the debt. While the creditor may recoup less than originally owed, money recouped would still be more than if bankruptcy were filed, in which case the creditor could lose all owed money.

Each person's situation is different, and the negotiation process varies based on debt owed and other factors. It also should be noted that not all institutions are open to such negotiations.

However, as Franco Bianchini, owner of the National Credit Exchange, warns, there is no free lunch as consumer credit scores tend to be negatively affected as credit reports will show evidence of debt settlements and the associated FICO scores will be lowered as a result. That being said, a recent study by the National Economic Research Association shows that, while debt negotiations will affect credit scores initially, completion of the program will increase one's ability to take on new debt in the future and rebuild his or her credit score as the process moves along.

As I mentioned, this is one potential solution and it may not be for everyone. But at a time when credit availability is tightening against an uncertain economic backdrop, it makes sense to me that we should look to get our credit house in order.

c Chris Versace is the founder and portfolio manager of SlipStream Capital Management LLC based in Reston. He can be reached at [email protected] washingtontimes.com. At the time of publication, Mr. Versace had no positions in the companies mentioned in his column, although positions may change at any time.

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