Credit card debt and its scary implications
If you’ve been following my interest in getting out of debt, you’ll probably like this article in today’s Sunday Telegraph. Every week I read the views of this economist… what he thinks of the price of oil, the pound/dollar exchange rate, the housing market and lots more. In this week’s column he’s talking about debt… particularly the differences between secured and unsecured debt.
From what I understand, the world has been living in a low-interest rate environment… which has fed the housing market boom and the uptake of cheap loans, overdrafts and credit card deals.
But with the US Federal Reserve hiking rates over the past eighteen months, the European Central Bank boosting rates recently and even the Bank of Japan raising rates from zero (”Bank of Japan, confident of economic recovery, raises interest rates for 1st time in 6 years” - July 14th 2006, Associated Press) , the interest rate scene has changed.
Those people with big mortgages (not uncommon at the current high house price valuations) will be acutely sensitive to increases in interest rates… even more so for people with big mortgages and credit card debit. Central banks need to be very careful in their raising of rates to avoid precipitating a crash… either a housing market crash or a stock market crash if people’s confidence in their ability to repay their debts were to falter. High oil prices (which mean high gas/petrol/diesel) prices will also hit people’s cashflow hard as they filter down.
If higher rates are on the way, paying off as much debt as you can now seems a wise move. We have had it very good, economically, for a very long time. People have saddled themselves with lots of extra debts in a time of low inflation, high employment and low interest rates. Sooner or later the party will end and people who haven’t been paying attention will get burned. On the other hand, change is always accompanied by fresh opportunities…
