In a strange twist of irony, the number of people defaulting on their home loans is on the rise while consumers are actually doing a pretty good job of keeping on top of their credit card payments. Of course, there are still those that are defaulting on making these payments, but the number of people failing to make these payments has not gone up or down over the past several months.
Nonetheless, analysts are still concerned that credit card companies will be starting to see trouble pretty soon. According to Merrill Lynch, the balances on consumer credit cards went up 11% in May and June. As such, analysts are fearful that consumers are leaning way too hard on their credit cards to get them through thin times.
At times, consumer credit card spending can be a sign of an upbeat economy as consumers feel good about the state of the economy. But, since retail sales have actually been down lately, it shows that consumer spending is actually down while spending increases. Merrill Lynch hypothesizes that this is because homeowners that have been stretched thin are turning to their credit cards to help them make payments before they are forced to foreclose on the home. As a result, the company expects to see an increase in the number of credit card delinquencies within the next six to twelve months.
Although consumers cannot directly pay their mortgage with a credit card, they can use the credit card to make other payments so they can hang onto the cash needed to pay their mortgage loan. Or, the consumer can get cash advances to pay the loan. Of course, this results in a vicious cycle and large finance charges that ultimately catch up to consumers that are struggling to keep up.
Therefore, it may not be so much that consumers are willing to walk away from their homes. Rather, they may finally get so caught up in this cycle that they finally decide there is no other alternative but to let the house go while trying to maintain a good relationship with their credit card company. How long this will last, however, is what is of the greatest concern to the credit card companies.
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