American Consumers Face End of Era of Cheap Credit

Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.

That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

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Living without the plastic cushion

This is one of the best articles I have read in a while.

Lisa Brough was forced into a debt-free life by medical disaster.

Her husband has Huntington’s disease, a degenerative brain disorder, and has been unable to work since 1999. The couple, who have three children, saw their finances suffer as a result. They ended up with $50,000 worth of credit card debt as Brough worked two jobs and still struggled to pay the bills and the high property taxes on their home in Westchester County, N.Y.

“I said to myself, ‘I can’t do this anymore,’ ” she recalled. “He was going downhill, and I had to figure out a way to get out of this. I couldn’t count on tomorrow because I didn’t know what tomorrow would bring.”

In 2005, she took drastic measures. She decided to sell her $350,000 home, pay off all the family’s debt, and move to lower-cost Cary, N.C., where she was able to buy a house for $164,000 house in cash.

Since then it’s been cash and debit cards only for Brough, 50, who has no debt of any kind.

How does she do it? She buys secondhand furniture and electronics, gets her husband’s medicines from Canada at cut rates, has a $10,000 emergency fund and thinks long and hard before she opens up her wallet.

“When you use cash you think about what your needs are because you’re paying a big chunk of money at once,” she said.

This concept is probably a foreign one to many Americans who are addicted to buying almost everything on credit. But believe it or not, it is possible to survive and thrive without depending on credit cards. In fact, Brough is part of a small but growing debt-free movement, some joining because of personal or economic hardships, and others just looking to simplify their lives.

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Great Credit? Hold onto your wallet... it's about to be picked

I have made this point in the past, usually in more nuanced language. But it bears repeating. And for those who prefer plain English, let's lay it on the table. Credit cards are evil. And the institutions that issue them are scum sucking crooks. Credit is just a fancy word for 'debt.' And "debt" is a four letter word. I strongly endorse a credit cardless society. It will be a great day when American's finally decide they are tired of being ripped off by these thieves, cut up their plastic and ship the pieces to VISA, Master Card, American Express etc. in a box weighted with lead bars C.O.D.

The credit industry's unethical, and soon to be (though not yet) illegal practices by which they milked hundreds of billions of dollars over years from people was enough to make me swear off their plastic millstones from around my neck years ago. But now that Congress is finally about to crack down on at least some of their shady lending practices, which would make members of a certain Sicilian fraternal society blush, they have decided to start soaking those with solid gold credit.

For those who harbor any doubts, read this.

Banks Belatedly Tighten Credit, Hurting the Economy

Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring.

Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term “commercial paper” not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001.

The scarcity of credit has intensified the strains on the economy by withholding capital from many companies, just as joblessness grows and consumers pull back from spending in the face of high gas prices, plummeting home values and mounting debt.

“The second half of the year is shot,” said Michael T. Darda, chief economist at the trading firm MKM Partners in Greenwich, Conn., who was until recently optimistic that the economy would continue expanding. “Access to capital and credit is essential to growth. If that access is restrained or blocked, the economic system takes a hit.”

Companies that rely on credit are now delaying and canceling expansion plans as they struggle to secure finance.

Drew Greenblatt, president of Marlin Steel Wire Products, figured it would be easy to get a $300,000 bank loan to finance a new robot for his factory in Baltimore. His company, which makes parts for makers of home appliances, is growing and profitable, he said. His expansion would add three new jobs to an economy hungry for work.

But when Mr. Greenblatt called the local branch of Wachovia — the same bank that had been aggressively marketing loans to him for years — he was distressed by the response.

“The exact words were, ‘We’re saying no to almost everybody,’ ” Mr. Greenblatt recalled. “This is why God made banks, for this kind of transaction. This is going to slow down the American economy.”

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