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Recession, recovery, remember the lessons

Do you celebrate Dec. 5? It's the anniversary of the repeal of Prohibition, and, in 2013, parties were held across America to mark the occasion. If, 80 years on from the 21st Amendment, people still feel the need to raise a glass (or, more likely, several glasses) to the event, imagine how drinkers partied in 1933! It's normal to indulge oneself after a lean period: most Muslims still do this at Eid al-Fitr ("Festival of Breaking the Fast"), which is enjoyed each year when the month-long period of Ramadan finishes. Feasting after a fast is fine for the faithful, but may be less beneficial for those Americans who are tempted to increase their debt by the recovery's easier lending policies.

Recovery is feeling real

Of course, the economy has technically been in recovery for some years. But it didn't feel that way for many. Now, finally, there are signs people are regaining confidence:
  1. The Conference Board's Consumer Confidence Index, published Dec. 31, found sentiment regarding current economic conditions at its highest since April 1988.
  2. When the same organization measured confidence among CEOs, it found it had "bounced back," and described these business leaders as "upbeat," according to a Jan. 8 report. That attitude is a precondition of the investment that must occur if the recovery is to be sustained.

Homeowners buoyant

If businesspeople and consumers generally are feeling good, many homeowners must be ecstatic. Jan. 17 saw publication of The Market Pulse, CoreLogic's monthly publication about housing. This latest edition revealed:
  1. As a national average, year-over-year home prices rose 11.8 percent in November. That was the 21st month running when a rise in that measure had been observed.
  2. The number of homes in negative equity (or "underwater," meaning their market values were lower than their outstanding mortgage balances) had plummeted to under 6.4 million in September, the last month for which data were available. That same number had been nearly 10.5 million in December 2012, and over 11.9 million in 2010. In other words, 4.1 million Americans had, within a 10-month period, seen their homes go from negative to positive equity.

Greater appetite for credit

With so many millions of Americans, especially homeowners, feeling the fast is over for them, it's no surprise a whole lot are more comfortable taking on additional debt. At the time of writing, the latest consumer credit figures from the Federal Reserve relate to last November, and show the total then outstanding nationally (excluding mortgages) at $3,087.3 billion. That's up from $2,651.4 billion in 2008.

At $856.9 billion that month, credit card debt remains down on 2008, when it was slightly over $1 trillion, but that latest figure is a three-year high, and its trend throughout 2013 has been consistently upwards. Most of the additional credit in recent years comprises installment loans, including, most notably, student and auto loans.

Jan. 14 saw publication of the latest quarterly survey of U.S. and Canadian bank risk professionals by FICO. (How the hours must fly by in the office where that research is carried out.) Of the bankers who responded, 58 percent expected average credit card balances to increase over the next six months, while their expectations for delinquencies on such cards was the highest in two years.

No need to panic

"While the delinquency predictions in our survey aren't alarming, lenders will be keeping a close eye on these trends," remarked Dr. Andrew Jennings, chief analytics officer at FICO, in a statement. "Banks are walking a fine line -- trying to grow their lending portfolios without taking excessive risks."

And Dr. Jennings is right that things aren't alarming. Although overall consumer indebtedness is high, credit cards don't seem to be much of a problem for most -- at least for now. But, on a personal level, it may still be a good idea to err on the side of caution.

Credit card rates to rise?

One unknown on the horizon remains interest rates. On Dec. 18, the Federal Reserve issued a statement concerning the current thinking of its Federal Open Market Committee. It said it planned, "to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6½ percent." However, the link between credit card rates and that federal funds rate is far from direct, and some economists expect certain interest rates to rise during 2014.

If those for credit cards are among them, how might that affect you? Well, it won't, unless you carry forward balances. And, even if you do, any rise can, according to the Consumer Financial Protection Bureau, apply only to future purchases -- ones made at least 45 days after your card issuer warns you of the increase. There are exceptions if you've previously been on a low or zero-percent introductory rate, or if you have legitimately incurred a penalty rate. But, as a rule, existing borrowing, made before and during that notice period, has to attract the same rate it did before the rise.

However, that doesn't mean you won't be squeezed. Credit card companies generally apply your monthly payments first to the parts of your balance with the highest APRs, so new purchases could slow any debt-reduction plans you have, and increase your outgoings.

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