Fed's rate cut may be bad news for some
7:13 PM PDT, September 18, 2007
If Tuesday's larger-than-expected cut in interest rates makes it cheaper and easier for people to get loans, that could be bad news for Yusupha Touray.
By his estimate, Long Beach resident Touray, 27, owes about $93,000 in credit card, phone, utility and hospital bills. "When my bills come, I know I don't have any money to pay them," he said. "So I don't bother anymore."
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Nevertheless, Touray said he gets pitches from credit card issuers in the mail almost every day. If those pitches become a smidge more attractive because of lower interest rates, he said he may just be tempted to go even deeper in the hole.
"It's amazing," Touray said. "You keep saying no, and they just keep making more offers."
The Federal Reserve said its decision to cut short-term interest rates by half a percentage point was intended to ease the credit crunch in the housing market. That's another way of saying the main beneficiaries are heavyweight financial institutions that got slammed by investments in sub-prime loans.
For consumers, the rate cut will mean lower mortgages for some, but also lower credit card rates and lower rates for auto loans. And for those who aren't careful, it could result in even more debt for a country that's already drowning in consumer debt.
"There's definitely a danger that people will be tempted to take out too much credit," said Linda Sherry, a spokeswoman for Consumer Action in Washington. "They'll use it for things they want rather than things they need."
Since consumer spending accounts for about two-thirds of the U.S. economy, that's not necessarily a bad thing. But unless managed prudently, it can spell trouble for many households.
According to Fed statistics released last week, U.S. consumers are carrying a record $2.456 trillion in debt (not including mortgages).
The amount of revolving credit, such as credit cards, carried by consumers rose in July at an annual rate of 6.6%, or by $5 billion -- the third straight month of significant gains. Revolving credit was up 6.4% in June and a whopping 10.9% in May, the Fed reported.
Nonrevolving credit, which includes auto loans, registered only a modest 1.9% gain in July. That compares with 5.6% in June and 5.5% in May.
With lower interest rates, it's possible that revolving and nonrevolving credit will shoot higher. And with it, consumers' debt load.
Sima Azim knows all about that. The windows and display cases of her downtown L.A. jewelry store drip with bling -- gold chains, gold bracelets, gold watches.
Azim, 45, said that with the economy the way it is, she's seeing more people using plastic instead of cash to buy baubles.
"People love the gold," she said with a shrug. "So they use their credit."
Prowling the downtown area, I had no trouble finding people with debt problems.
Frank Banueloz, 44, works as a legal analyst for the state Department of Justice. He said he tries to manage his finances wisely. Even so, he and his wife are carrying about $10,000 in credit card debt.
"I'm trying to use cash more instead of credit," he said. "It's hard to do."
The flip side of consumers' record high debt level is a pathetically meager personal savings rate. According to the Commerce Department, the nation's savings rate for all of last year was minus 1%, the worst showing since the Great Depression.
That means people were spending every last penny they earned, and then were dipping into savings, stocks or other resources to spend just a little bit more. The savings rate crept up to 0.7% in July from 0.5% a month earlier.