It may seem extraordinary, but in 2008 a US consumer overwhelmed by a crushing mortgage and falling property prices may prefer to walk away from their house – literally hand in the keys – rather than default on credit card debt.
Changes in legislation a couple of years ago made it tougher for consumers to declare bankruptcy. Mortgage debt falls under different rules. But legal arguments aside, credit cards have become a way of funding one-off items and, increasingly, day-to-day expenses. Consumers will go an awfully long way before they give up their plastic.
Federal Reserve data suggests that mortgage equity withdrawals jumped from roughly 3 per cent of disposable income in 2000 to just over 7 per cent in 2006. Roughly a quarter of that was spent on repayment of non-mortgage debts, which would presumably include a fair bit of credit card debt.
Now that cushion is no longer there, will more credit card debt go bad? Not necessarily. Then, consumers were often making rational calculations about using cheap mortgage debt, rather than staving off default. So far, what seems to be happening is that consumers are continuing to use their cards while not paying down the balances as quickly as they used to. Banks may welcome the growth in receivables for now.
But they may be storing up future trouble. Given how widely cards have been marketed, and how indebted consumers already are – with household financial obligations at nearly 20 per cent of disposable income – this could come home to roost in 2008.
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