ENCINITAS, CA - Are tax rebate checks enough to counter America's growing debt load?
The Economic Growth and Tax Relief Reconciliation Act of 2001, signed into law by President Bush, was designed to encourage spending by mailing tax refund checks to every taxpayer.
However, new figures from the government suggest many of those checks may have to be used to pay off debt.
Debt On the Rise
Numbers released by the Federal Reserve indicate that personal debt, including credit cards, auto loans, and consumer loans, reached a record $1.58 trillion in April. Bankruptcies are on the rise, and write-offs by loan and credit card companies are increasing.
What's even more alarming is the amount of personal income being used to pay off debt. Americans are currently devoting 14.3% of their take-home wages to paying off debt, the highest levels seen since 1986.
What's causing this increase? Some analysts believe that we are now just paying for the excesses of the 1990s. When the markets were bullish, optimism increased, and more consumers took on debt under the assumption they could always pay it back. During good times, it's common for consumers to overextend themselves with credit.
However, as the economy cooled and unemployment has begun to rise, many debtors are now over their head. Savings rates have dwindled, and when a husband or wife is laid off, it becomes even tougher to pay that debt.
Fiscal Policy Threatened
The increasing debt load could serve to counteract President Bush's plan to reinvigorate the economy. Economists have noted that a slowing economy can be improved, and sometimes reversed, by an increase in spending. This might explain why the markets closely watch for the consumer spending figures when they're released every month.
To encourage spending, lawmakers have been pulling out all the stops. The tax rebate checks in the mail, as well as decreases in the Federal Reserve's rate, have all been measures designed specifically to encourage spending.
Excessive debt counteracts those measures, by forcing consumers to devote more resources to paying off their loans. And as the Federal Reserve notes, the amount of personal income heading to loan companies (and not being spent) is the highest it has been in 15 years.
The amount of debt is increasing, as are the number of individuals currently in default.
Credit card delinquincies, defined as accounts that were 30 days or more past due, have been steadily increasing since 2000. Delinquincies now hover close to 5%, according to CNN, up from 4.3% this time last year.
Mortgage delinquincies are increasing, as well. The Mortgage Bankers Association reports that delinquincies on home loans rose to 4.5% in the fourth quarter of 2000. Fortunately, delinquincies shrunk the first quarter of 2001, but a trend is definitely apparent.
How to Protect Yourself
Ensuring that you avoid the credit trap that is plaguing Americans is not as simple as ripping up your credit cards.
Most credit experts agree that if you have found yourself over your head in debt, you can follow these simple guidelines:
In extreme cases, where you're not even able to meet your minimum payments, it might be wise to sit down with a credit counselor. Credit counselors can often help you consolidate your debt and develop a specific plan of action.
For more information on protecting your credit, check out our SaveWealth Special Report on Smart Credit .