Weathering Tough Financial Times—The Long-term Costs of Quick Cash
Financial Industry Regulatory Authority, June 26, 2008
Rising costs of food and fuel, declines and volatility in the housing and financial markets, and an ever-tightening credit crunch have gathered to form a perfect storm that could lead some Americans to make poor financial choices. Not so long ago, those who faced a temporary financial setback, such as the loss of a job, a health emergency or an unexpected expense, could borrow or use credit to get by—and many still do. Recent data from the Federal Reserve show consumer use of credit cards and revolving lines of credit at an all-time high.
But while some Americans use credit as a safety net to weather life's occasional storms, others rely on it as a way to finance a lifestyle they otherwise could not afford. Debt has become a norm in the U.S.—and, according to the Center for Responsible Lending, households are finding it difficult to break that cycle. Similarly, personal bankruptcy filings continue to rise—as does the age at which consumers declare bankruptcy. A recent study by AARP found that in 2007 more than 1 in 5 debtors were over the age of 55, compared with 1 in 10 in 1991. The study also found that the rate of personal bankruptcy filings among those ages 45 to 54 had jumped by more than 48% from 1991 to 2007. For those ages 55 to 64, the rate rose by 150%—and for those ages 75 to 84, 433%.
In tough financial times, many investors feel pinched for cash—and some may search for different, often risky ways to make ends meet. Troubling trends include investors leveraging or prematurely depleting their retirement savings, trading in their insurance policies in transactions known as "life settlements," and tapping their home equity through reverse mortgages.
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