Are folks actually changing their spending habits?

Are folks actually changing their spending habits? Could be. A front page Wall Street Journal article this morning, Credit-Card Pinch Leads Consumers to Reign In Spending, makes a few telling points:

“Card delinquencies are ticking up from historically low levels, but the trend is sending shudders through lenders already reeling from the subprime-mortgage tumult. As a result, leery card issuers are bulking up their reserves against future card-related losses — and getting so much tougher on borrowers that some consumer are reining in overall spending.”

Get it? This means that even the credit card companies are now saying “You know what? Maybe that guy who’s completely maxed out his credit card and has been unemployed for three years might not be a good bet to lend more money to.” And, <gasp> they cut him off.

Obviously, that’s an extreme example (and a made-up one at that), but it’s important to recognize the overall phenomenon: lenders who formerly weren’t paying much attention to a borrower’s ability to pay back a loan now are investigating that likelihood before lending more money. Furthermore, the article notes

“Yesterday, card issuer Discover Financial Services said 49% of consumers it surveyed in January plan to reduce their discretionary spending this month. That was an increase of five percentage points from its December survey and a 10-point jump since September.”

While such information is often presented as bad news for the overall economy (because less spending by you means less income for others), I believe that’s a long-term good sign. Individuals can’t simply pay back old debts by borrowing new debts forever. (The government can, but that’s only because it can print money. You can’t.)

Yet borrowing from Peter to pay Paul is what’s been happening:

“Sinking home prices have made it much harder to convert home equity into cash for living expenses.”

Now, suddenly, it’s hard to pay off your credit card bills by simply borrowing money on the value of your home. Uh oh. Game’s up. Time to pay your bills.

What’s the best path of action for you?

Don’t get in this mess in the first place. Simply spend less than you make and you’ll never be in debt.

Is it too late for that?

Fine. Same plan of attack: start spending less than you make. That is the only way to come up with the cash you need to pay down your existing debts. Any other strategy, especially those you must pay for, is just fool’s gold. Until you live within your means, any short-term borrowing simply sets you up for a bigger fall a short while later.

Why do that when you can choose to live Beyond Paycheck to Paycheck?

“personal finance” “financial education”