October 25, 2012

How long has it been? 6 months maybe since we’ve heard about consumer credit. What we’ve heard about is household debt and mortgages. And more or less the same message from government and the credit industry. “How we must avoid what happened to the United States housing market in Canada.”

And, you know what? Yesterday was the first time I heard someone highly respected from the credit industry, Helmut Pastrick from the BC Central Credit Union, comment that what happened in the United States was much different than in Canada. He correctly said that we have much better lending standards and regulations in Canada. Some of the mortgages that caused difficulties in the United States for both borrowers and lenders were as the result of fraud.

Hallelujah. This is what I’ve been saying. But it wasn’t just a few isolated instances of fraud. The fraud and the deception were institutional and reached the highest levels of several investment banks and financial institutions. This is what caused the credit crunch and meltdown in the United States.

Meanwhile, the mysterious world of consumer credit continues to enjoy silence and avoidance, particularly with respect to interest rates on credit cards while the Bank of Canada’s prime lending rate has been the lowest ever.

Today, finally, credit cards get the public spotlight as the federal government takes a few baby steps to regulate prepaid credit cards and ban expiry dates on these specific cards. What has been announced is this: In the future, issuers of prepaid credit cards will not be able to set expiry dates and they must be up front about hidden fees and conditions.

Sure, stopping the expiry dates is good, although this should have been done a long time ago when mercantile gift cards received public criticism for expiry dates. But, being up front about hidden fees and conditions doesn’t sound like much of a regulation to me. It doesn’t stop the practice. It’s simply a matter of disclosure.

Of course prepaid credit cards have been popular with a vulnerable and desperate portion of the population – young people who have not or cannot qualify for a conventional credit card and those who have lost their credit card through a bankruptcy or a lost credit rating. I am certain that many of these people will not pay much attention to excessive fees being charged or restrictive conditions for the same long list of reasons anyone “needs” a credit card in a credit society.

Rob Carrick from the Globe and Mail reported today on another significant component of the consumer debt crisis in Canada in his article appropriately entitled, “How Car Loans Help Drive Affordability Delusion.”

He uses the expression of delusion to refer to excessively long instalment plans to purchase a car, like 5 years or more. He cited research firm J.D. Power and Associates that showed 57 per cent of buyers are going with terms of six years or longer. This is what is delusional in his opinion, and illustrates perfectly that, if you need 5 or 6 years to pay for a car, you probably can’t afford it.

This has been the magic of credit cards and the credit system since the 1970s. We use them both when we want or need something and, do not have the earned income or savings to pay for the goods and services – now.

This is exactly why we must take the consumer debt issue out of the confusing mortgage/investment portfolio and see it for what it really is. Governments also need to see the relationship of an impoverished middle class, and increasing disparity between the wealthy and everyone else, to excessive consumer debt levels. A good starting point to help middle and lower income groups is to regulate interest rates on credit cards, and restrict the amortization periods for car loans.

A more long term plan for consumers and governments involves income. The middle class and lower income families are simply not earning enough to meet all of the necessary expenses to raise a family.

And soon to further increase your necessary expenses there is a new “tax”, oh sorry, I meant “toll” coming to a bridge near you... don’t get me started on that one...

How are families going to cope?

Remember, if you are experiencing financial difficulties do not wait. Call Solutions Credit Counselling at 1(877)588-9491 or fill out our Debt Consolidation Questionnaire and get your Free Credit Counselling Advice today.

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