…… & NOW CREDIT CARD CRISIS IN AMERICA
Emergence of global financial meltdown was the effect of failure of the sub-prime mortgage and financial securities market. (Sub-prime borrowers were those that had less healthy loan repayment abilities.) The US is in deep financial trouble. The US credit card default rate have reached an all time high of 13% in March-10, and the total outstanding credit card debts per household which holds credit card debt, reached a staggering $16000 in the same month. The survey conducted by Fitch Ratings reveals that 98% of the total revolving debts in the US are made up of credit cards. Another astonishing fact was that 92 million of all US households hold one or more credit cards. Since 1970s fall in real wages of Americans have increased the usage of credit cards in the country. Americans mostly use the credit cards on housing, food, education, and health care. But with unemployment rates still hovering around 10% mark, default rates have increased over the past two years. Thereby catalyzing concerns that a chain reaction could pull the entire system down.
Credit card debt
• Average credit card debt per household with credit card debt: $15,788
• 76 percent of undergraduates have credit cards, and the average undergrad has $2,200 in credit card. Additionally, they will amass almost $20,000 in student debt. (Source: Nellie Mae, “Undergraduate Students and Credit Cards in 2004: An Analysis of Usage Rates and Trends”)
• Total U.S. consumer revolving debt fell to $866 billion at the end of 2009, down from $958 billion at the end of 2008. About 98 percent of that debt was credit card debt. (Source: Federal Reserve’s G.19 report, March 2010)
• The mean, or average, unpaid credit card balance last month was $3,389. The median is $90. (Source: “The Survey of Consumer Payment Choice,” Federal Reserve Bank of Boston, January 2010)
• About 45 percent of consumers said their unpaid credit card balance had gotten “lower” or “much lower” in the past 12 months. Only 26 percent said it had gotten “higher” or “much higher.”
DEBT COUNSELLING: AN INSIGHT- I
The recent collapse of the major financial institutions & banks, sub-prime crisis had brought the ‘Debt Counselling’ in to lime light. The bankruptcy of the Bear Stearns, AIG, and Washington Mutual are the examples of the excessive credits given to the people. As a result most of the banks & financial institutions have started Debt counselling. Debt counselling is also known as ‘Credit counselling’. Debt counselling is a win- win situation for the banks as well as for its customers.
GLOBAL SCENARIO
There is variety of ways in which debt counselling has been accomplished in different countries. The first debt (credit) counselling agency was created in 1951 in US known as National Foundation for Credit Counselling (NFCC). In US, The Bankruptcy Abuse Prevention and Consumer Protection Act 2005 have made credit counselling a requirement for consumer debtors filling for bankruptcy. The debtor must complete a program within an approved non profit budget and credit counselling agency during 180 days preceding the date of filling for bankruptcy.
INDIAN SCENARIO
Globalization and financial innovation has phenomenally increased retail lending in the commercial banking sector. In recent times consumer loans, housing loans, credit cards & personal loans have registered a tremendous growth. The credit growth in these sectors grew at a Compound Annualised Growth Rate (CAGR) of 43.3% during 2001-06 as compared to overall growth of credit of 23.4% in the same period. Costly medical emergencies, retrenchment from jobs, increased intrest rates have raised debt burdens in some cases. The aggressive marketing of personal loans and credit cards to venerable sections of borrowers leads to over indebt ness and rising NPA’s (Non Performing Assets).
DEFENITION
Debt counselling can e defined as ‘counselling that explores the possibility of repaying debts outside bankruptcy and educates the debtor about the credit, budgeting and financial management’.
OBJECITVES
The debt counselling serves various purposes. They are:
1. (a) It examines the ways to solve current financial problems.
(b) It helps educating people about the cost of misusing the credit.
(c) Benefits and encourages poor and distress people to access the formal financial systems.
2 The objective was to promote financial literacy and help consumers to avoid bankruptcy.
3 It helps proactively to manage their debt via out-of- court procedures based on agreed repayment plans between creditors and the debtors.(…cont.)
IT’S ALL ABOUT MONEY!
The fallout of American economy and ongoing financial crisis had affected every one. As a rescue measure US government has announced a total package worth about 990 billion dollars. Some of the European countries have also announced a bailout package. The collective of US & Europe comes to about 1.8 trillion dollars. In the same way the Black Money of various politicians, diplomats, entrepreneurs deposited in Swiss Banks should be utilized. But you will ask why?Here is the answer. As per Swiss Banking Associations Report on ‘Black Money’ the 5 major countries have their money in Swiss Banks. According to an official of Swiss Bank, the money deposited by Indians is so much that Switzerland’s 10 Five year plans can be completed.
|
Rank |
Country |
Amount($ crores) |
|
1 |
India |
14560 |
|
2 |
Russia |
4700 |
|
3 |
England |
3900 |
|
4 |
Ukraine |
1000 |
|
5 |
China |
960 |
MONEY MATTERS!
In the globalised and fast moving world everyone is busy in fulfilling their greed of earning more money. Most of the people often allow the power of money to control them. The people starts getting up earlier in the morning and working harder, but they fail to understand that ‘Money is the root cause of all evils’. There is the financial cycle which goes on and on. Every one faces it right from childhood till death. As we grow up we go to school, college, and get attached with a company or start our own business. With our growing age our thirst for money also grows up and we are now trapped in Rat Race for rest of the working days. They work for the owners of their company, for the government paying taxes, and for the bank to pay off bills and mortgage. More money does not solve the problem; in fact, it may actually accelerate the problem. Money often gets you in debts instead of helping you to get out of debts. Money often puts a spotlight on what we do not know.
It has found that with the age group of 20- 35 most of the people like to hang out in pubs, purchasing branded garments, cars, house, going for weekends with your loved one and many more. To fulfill that they work hard earn a lofty amount and spend it like anything.
The people purchases more than that of their paying capacity. Easier credit cards and loan facilities from financial institutions encourage the people. When we ask people why they need money? The most common answers we find that they want to get rich or ‘I m in debt so I need to make more money.’
The recent sub prime crisis and bankruptcy of major banks and financial institutions like Bear Stearns, Lehman, AIG, and Washington Mutual are the examples of excessive credits given to the people. To avoid these problems most of the financial institutions have started Debt Counseling for its customers as a ‘goodwill gesture’.
Debt Counseling is one of way to pay off your bills and to get out of debt. “It is a corporate social responsibility initiative.” Debt counseling centers offer advice for all categories of credit—credit cards, personal loans, home loans, and so on. Their services are creditor-neutral, that is, they help you out no matter what institution you borrowed from.
HOW DEBT COUNSELLING WORKS?
Debt counsellors make a holistic assessment of your situation, and give you an appraisal of the costs involved—interest rates, fees, all the fine print. For instance, credit cards are the most expensive kind of debt, with annual interest rates of 42% to 49.36%. When you add the charges, they work out to more than 50%. The next step is to list payments that you, the borrower, can make—dues, equated monthly installments, and so on. The centre can help you request creditors to restructure loans. So, for instance, you may end up with a longer repayment schedule but more affordable EMIs. For example a negotiated repayment at 8% simple interest over 36 months. “It’s a win-win situation for banks and customers.” Banks avert a messy recovery process, and get at least the principal back. And borrowers get help paying off dues. All of this, though, applies only if a bank is convinced the borrower is truly willing to pay off bills, and genuinely cannot stick to the original schedule. It (the initiative) has been able to discern people facing genuine difficulties from intentional defaulters.
BEST STRATEGY
Don’t pay the minimum due on your credit card; pay the full amount each month. Don’t take an expensive loan to pay off a previous loan. If you have more than one loan, pay off the most expensive one first. So it makes sense to pay off credit cards, then personal loans, then lower-interest debts. If you must borrow, do so against a security such as property or shares. Such loans (14% to 16% interest) are cheaper personal loans (19% to 21%). And lastly, if you can borrow from helpful relatives to pay off your debt, do so!