As Home Equity Credit Becomes Scarce, Credit Card Use Increases

The Associated Press reported yesterday that consumer credit rose by $7.5 billion in July, an increase of 3.7%. Credit card debt rose by 6.6% in July, suggesting that consumers are turning to credit cards instead of home equity to finance purchases. Access to home equity has been reduced as mortgage lenders continue to face cash flow problems.

Reading between the lines, it would appear that consumers are using credit cards to finance large ticket items, such as:

• housing costs - including increased monthly mortgage obligations as adjustable rate mortgages reset
• big ticket items such as home repair, college costs and medical costs that otherwise would be appropriate for home equity lines of credit but now have to be shifted to credit cards and higher interest rates

It will be interesting to see if bankruptcy lawyers around the country start to see clients with higher credit card balances and lump sum purchases. These types of balances can be dealt with in bankruptcy but different strategies apply - a topic I’ll discuss in a future post.