Maria Bartiromo, Anchor: With all those shoppers out charging more on their credit cards this year, will consumers be facing a debt crisis come January? That's today's hot topic. Michael McAuliffe is President of the Family Credit Counseling Service, and Scott Brown is Chief Economist at Raymond James.
Gentlemen, nice to have you with us, happy holidays. Michael, tell me about the debt situation, how bad is it?
Michael McAuliffe, President, Family Credit Counseling Service:
From my perspective, it's bad, it just continues to get worse.
Bartiromo: What does that mean?
McAuliffe: Well, consumers say they don't want to spend money on Christmas, but when it comes down to it, they do. And they charge it and they're even charging things now, with their house. A lot of home equity loans are tied to your house, and people using credit cards to use them.
Bartiromo: Right, and so the implication is that, if we, we see these comp-these consumers being unable to pay, uh, back their debt. Uh, that could impact the economy, uh, terribly, actually. Scott, tell us the implications of consumers charging on their credit cards.
Scott Brown, Chief Economist, Raymond James Financial: Well, I think, certainly, you do see a seasonal pattern every year where, consumers will borrow on their credit cards for holiday shopping and then pay the balance down in early part of next year. I don't think the level of debt is too serious. It's very high but, what really matters is debt service burdens. And those, I think, are pretty manageable at this point.
Bartiromo: I guess the last quarter, when we had on a number of the financial services executives a couple of CFO's of big banks told us, and even Ken Lewis, from Bank of America told us that he didn't find that the-actually, the credit quality was, was pretty strong. A number of banks said that, that-are saying what you're basically saying, Scott.
We have a graphic here, of the household sector. It's called liabilities, household credit market debt outstanding. Let's show that graphic, here-and I'd like you guys to talk a little about how easy it will be for consumers to pay back their debt, come 2006. Michael?
McAuliffe: Well, I think it's going to be difficult and I think it's gonna get more difficult for a contingency of consumers who don't realize that minimum payments are increasing. And for many consumers, they're going to double, here in the, in the first quarter of next year.
Bartiromo: That graphic that we were just looking at showed that total American debt is forty trillion dollars, uh, Scott. Now, relatively speaking, we're looking at a graphic and it's just gone up and up and up since 2001 but it doesn't seem to concern you.
Brown: Well, the wealth effects, certainly, far outcede the debt levels of consumer's liabilities.
Bartiromo: It's true, we're looking at graphic right now, debt versus income, and debt is obviously exceeding income!
Brown: Yeah, a lot, a lot of that is, is, uh, is the housing market. Um, you know, we've had huge increases in mortgage debt, but we also have had huge increases in mortgage equity, as well. Uh, I think the real issue, though, is when you start spreading it out and looking across the income scale, I mean, there, there are very different stories out there and the impact on the consumer is very much uneven.
You're gonna have a number of, of households that are gonna have trouble with debt and meeting debt obligations. Uh, those at the high end, obviously, aren't gonna have much difficulty. And you really have that middle ground now, we saw some impact, I think, after Katrina, when gasoline prices got to, to three dollars, that it became much more serious, uh, serious issue for the middleclass. Uh, with gasoline prices down now, um, it's, it's not quite as serious.
Bartiromo: Michael, give me your best advice. How do you recommend-I mean, you're dealing with families and people in debt all the time, what recommendations do you give to people who are either trying to get out of debt, or facing this issue? And what are you expecting for '06?
McAuliffe: Well, I think one of the most important things is to understand that you can't borrow your way out of debt. We keep talking about our homes are appreciating-and that's absolutely true. But, when you take the home equity loans out, you can't pay that off with appreciation, unless you're not going to have a house! So, that money has to be repaid.
Credit cards-the interest rates are high, consumers are now using them for a lot more discretionary expenses than they used to. You need to start being proactive, you need to realize, credit cards are bad way to do business. Home equity lines are bad way to conduct your finances.
Bartiromo: Scott, in, in terms of looking at the companies that you follow are there companies that have benefited from this trend or could get impacted by this debt situation not being as what Michael thinks?
Brown: Well, certainly, in, in terms of the transaction demand, um, one point was correct there that, uh, people are using credit cards for routine purchases, now. You buy groceries, you buy gasoline all the time with credit cards. Uh, it's, it's very simple, now and so, many people will have higher balances and those companies that do those transaction profits-or transactions, should benefit from that.
Uh, in terms of overall consumer spending, though. I think, uh, again, it's a very mixed bag. Uh, the, the real burden from, from debt and from higher energy costs are really gonna fall higher at the low end of the income scale. Uh, the higher end spending is, is not gonna be affected very much, at all.
Bartiromo: All right, we'll leave it there. Gentlemen, nice to have you with us. Happy holidays to you both.
