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Lenders See Signs of Increase in Bad Debt
HSBC, the third largest bank in the world by market value and a major force in credit lending in the United States and elsewhere, has forecast increasing defaults on credit cards and other loan types in the next few months.
The warning comes as the credit lending industry has seen two quarters of declining credit quality. Quite simply, people who take out loans are failing to repay them.
HSBC knows the industry. The bank is one of the largest lenders in the nation for people with below-average credit worthiness, and is bracing for an increase in bankruptcies and higher losses from defaults. The trend in greater loan delinquencies began in the second half of 2006 and is not expected to abate early next year.
There are a number of contributing factors to the increase in bad debt. The number of bankruptcy filings is rising again in the U.S. after a predictable drop due to the new bankruptcy reform act that went into effect in October 2005. And interest-rate increases can make it harder for some borrowers with adjustable-rate mortgages, ARMs, to meet their obligations. Approximately one-third of single-family home loans in the United States are ARMs, whose interest rate, and consequently the monthly mortgage payment, adjusts periodically according to a market index. With interest rate increases expected again in 2007, the monthly mortgage payments may climb beyond many homeowners ability to pay.
Additional factors include mounting gas prices that make it more expensive to own a car. And consumers who cannot afford their monthly bills are less likely to go out and spend on holiday shopping, typically the time of year to see a spike in consumer spending. Worse, some may turn to credit cards to cover their necessary and discretionary payments. Households may start amassing more debt in addition to already taxed finances.
For consumers who are facing stark realities, the first step is to get some sound financial advice. Investigate the possibility of refinancing into a fixed-rate mortgage. Consolidate credit card debt on to one low-interest rate card. Both options likely require that you have good credit, so make sure you take action before your credit rating tanks. And continue making the payments on all of your bills while you reassess your strategy. Listen, HSBC and other lenders will rebound. Take steps to make sure that you will too.
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Andrew Marx writes articles on topics including personal finance and higher education, emphasizing a practical and informed approach to his ideas. His weekly column can be read at http://www.smartremarx.com/
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