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According to a report by CNN Money, lending is still down at the nation’s largest banks. There has already been a significant decrease in residential borrowing as banks have tightened credit standards and loan demand has decreased. Residential borrowers are overextended and have found it near impossible to get financing without a very good credit score and significant capital reserves. Loan demand has dropped and the personal savings rate has skyrocketed to 6.9%. Now that the residential side appears to be stabilizing, commercial real estate is showing weakness. Commercial and industrial lending has seen a precipitous decline as businesses are looking to get leaner and borrow less money.

Lending activity has been curtailed due to lender concerns over economic stability, involuntary unemployment and credit borrowers defaulting on credit agreements. Many consumers who have defaulted on loans during the economic downturn will find it more difficult to borrow in the future due to having an adverse credit rating. Adverse credit means that a consumer is unlikely to be able to gain access to traditional lines of credit for the purpose of debt consolidation, particularly if a tenant or homeowner has little equity.

Banks are lending less and they have a good reason for it. Many economists estimate that banks are only halfway through the losses that they will suffer over the next few years. While most subprime loans and residential loans have already been accounted for, many commercial loans are just starting to show weakness. Many commercial borrowers are looking to refinance loans that have interest rates that are resetting. These borrowers are unable to obtain financing because the value of their commercial properties has dropped below the principal owed on the property. Even M & A activity has seen a severe decline as banks are looking to lend less.

So what is the next shoe to drop? Credit cards.We are just beginning to see weakness in the credit card market. Credit card lenders American Express and Capital One are seeing increased delinquencies. The monthly charge off rate rose to a record high of 10.6% as consumers continue to grapple with the debt problem. Moody’s expects charge offs to peak at 12% meaning more losses for financial stalwarts such as JP Morgan, Bank of America and Citigroup. Many borrowers, who pay their bills on time, have seen their credit terms changed to cover the growing deficit from increasing charge offs. Individuals with good credit have seen their credit limits slashed and interest rates rise.

While the speed of the economic slowdown is declining; the economy cannot heal until unemployment, foreclosures and defaults stop cascading downward.

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I have read numerous books and articles that detail the difference between good debt and bad debt. Television financial experts tell us that debt is not a bad thing. That its all about how you manage debt. We have been taught that good debt is borrowing money to purchase something with the expectation that the price will rise. Home mortgage loans, student loans and business loans are examples of good debt. Conversely, we are taught that bad debt is borrowing money to purchase something that will depreciate in value. Auto loans and credit card loans are examples of bad debt. I have a different point of view on debt. I think that there is basically no distinction between good debt and bad debt.  All debt is bad debt. There is no such thing as good debt. Any form of debt is a liability that must be repaid. Debt can turn into an albatross that stays with you for years and years and years.

Money that is borrowed must be repaid at a specified interest rate regardless of the value of the purchase. There is no guarantee that an asset purchased through the use of credit will appreciate in value. There are countless examples of this type of situation. Individuals that bought homes during the housing boom because they believed that real estate could only appreciate in value. individuals that purchased stocks on margin because they believed that the stock market would only increase in value.

Am I saying that it is never worth using debt for things such as financing your education or purchasing a home?  No, I just want us to rethink our views on using debt.  Situations may arise where we have to use debt to pay for a necessity. But that still does not make it good debt. The only people that debt is good for are the lending institutions. Capital One, American Express, Bank of America and JP Morgan Chase are some of the biggest beneficiaries of our use of “good debt”. Sometimes I think about the headaches that I could have saved myself from by not relying on so called good debt.

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1) Renegotiate your high interest rate loans.

High interest credit card debt can be renegotiated with your credit card company. You can call your credit card company and negotiate a lower interest rate. If your company refuses you can threaten to transfer your balance to a lower interest credit card. Many times this will make the company grant your request. Credit card companies do not want to lose your business to a rival company. If that doesn’t work then transfer the balance to another card with a lower rate. High interest automobile loans can be refinanced at your local credit union in as little as nine months. Lowering your interest rate from 18% to 8% is the same as receiving a 10% return on your money. It allows you to keep more of your own money.

2) Live within your means.

Attitudes and habits that condone overspending can really hurt your future goals of achieving financial security. Habits such as spending money consistently on new clothes, shoes and jewelry. You would be surprised at how quickly entertainment expenses such as buying movies, music, going out to eat add up. Always having to have the latest car for example can also hinder your ability to save. These types of habits will keep a person debt ridden for years. Too many Americans already live paycheck to paycheck. It is critical to adopt the perspective of having your money work for you. Whenever you save, your money is earning interest and working for you. Whenever you are spending, you are working for your money. Always remember that just because you have the credit to pay for something does not mean that you can afford it.  

3) Never pay the minimum.

Paying only the minimum will keep you in debt for years. It also ensures that you will pay thousands of dollars in interest to your credit card company. For example, if an individual with an $8,000 credit card balance at an 18 percent interest rate makes only the minimum payment. It will take him over 30 years to pay off the balance. Paying an extra $20 or $30 per month can greatly reduce your balance over time.  Remember that you only agree to pay back the principal when you borrow money; never the interest.

4) Watch out for hidden fees.

Lenders make a fortune by charging fees to consumers for any violation of the account agreement. These fees are typically located in the small print of your agreement. Companies charge fees for late payment, overdrafts, account maintenance, inactivity and more. Be sure to read your agreement carefully to avoid hidden fees. One late payment can change your interest rate to the highest rate allowed by law.

5) Create a safety net.

Remember to save money while you are paying off your debt. Sometimes people will pay their debt off and have no remaining cash. Then they are forced to begin using their credit all over again. The best way to create a safety net is to make a firm commitment to save a certain amount of money each month. Pick an amount that you will be able to stick to each month. A good rule of thumb is to begin by saving 10% of every dollar that you receive. Automatic deductions to these accounts can ensure that you make regular contributions at the same time each month.

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