Dec 21, 2012 Philip Burgess
The United Stated Federal Reserve released its G.19 report in December 2012 which shows that total outstanding revolving debt is up by 4.7 percent, adding on $3.4 billion in October. This data was released alongside the heated debates in Washington around President Obama's budget cuts and rising fears over the fiscal cliff. Concerns about how to kick-start the economy and allow Americans to get back on track when it comes to consumer credit and lending are coupled with the federal debt-to-fiscal spending ratio. Increased debt means that more borrowers could struggle to pay off credit cards and other loans, and delinquencies may rise, prompting accounts to be handed over to debt collection agencies.
Credit card usage
Consumers may have turned to credit cards more frequently in the fourth financial quarter of 2012 because of decreases in spending, which might mean a lack of available cash. Another factor may have involved individuals preparing for and recovering from November's Hurricane Sandy. Many people who lost homes and other property are still awaiting recovery money, and this credit card spending may be bulging for people picking up the pieces. This increase in debt could ultimately negatively impact consumer credit data, but might lead to an increase in delinquency or defaults on lines of credit.
The fiscal cliff
Financial insiders worry that the fiscal cliff facing Congress could lead to increased taxes for the majority of Americans, leading to a further increase in consumer debt. At the same time, to avoid a second subprime crisis, lenders might approve fewer loan applications, decrease spending limits and raise interest rates to cover overheads. This would lead to an increased emphasis on consumer credit reports, and probably increase the number of underbanked individuals seeking out credit. The debate around the fiscal cliff has already been filled with accusations from both side of the aisle, but it seems like a bipartisan solution is necessary to not drive the budget over the metaphorical cliff.
Alternative credit might be needed for some consumers who are not approved for new lines of credit. In these cases, consumers may turn to short term loans from short term lenders. The fiscal cliff might raise opportunities for lenders who are willing to consider a variety of payment histories, establishing alternative credit data that may help secure new loans.