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Consumers Still Hurting Despite Loan and Card Reforms

It is still possible to get credit today even if you’re in a terrible financial mess. However, be prepared to shoulder the cost of it. Despite sweeping reforms in the credit card law that are designed to stop banks from plunging borrowers deeper in debt, banks are still lending with devastating terms.

Consider the interest rate charged on some subprime credit cards: 59.9 percent. This is unfair and unrealistic whichever way you look at it. There are also an array of cards and loans available from prepaid cards to payday loans, which comes with a very high rate.

Bank’s Point of View

Financial institutions reason that the high interest rates and fees they charge are prerequisites of the business. This is because they are taking the risk that borrowers will default on the loan. They reason out that putting a cap on their interest rate will put them out of business. And even put consumers who need money most with no recourse than to rely on public services.

Nevertheless, President Obama and advocacy groups want better consumer protection. The President is pushing for a consumer protection agency that will oversee how financial products are handled. Right now though, its future is uncertain and negotiations are still underway for a more sweeping reform.

Worse Options?

Kathleen Day from the Center of Responsible Lending said that, “It’s in nobody’s interest to lend people money they can’t afford to repay.” That’s probably why about a quarter of households are not associated with any bank. Even if they are, many rely on alternative services such as payday loans, prepaid cards, or subprime credit cards.

As opposed to McDonald’s 14,000 branches, there are about 22,000 payday loan branches around the United States. This presence highlights the fact that many consumers are in a pinch. Around 19 million people took advantage of their services last year because it is a quick way to get cash. Basically, you just need to give the lender a postdated check of the loan amount plus the fee. Payday lenders usually ask for $15 or more for $100 borrowed.

On the surface, it is easy to understand the fee. But when you look closely, the average fee on the $100 loan translates to an interest of 391 percent in an annualized rate. While some states have banned payday lending, others worry that this may choke off an important source of money for cash-strapped individuals.

The New American Poor

Most Americans would never have thought it would come to this. The human toll of the recession is still increasing even as the economy shows signs of improvements. Millions of people remain out of work, with their unemployment benefits nearly running out. As majority of these individuals no longer have any savings to speak of, they are staring poverty in the face.

Strains on the Social Safety Nets

Analysts believe that the recovery will not be strong enough to uplift the long-term unemployed. They fear that more Americans will be left behind in this recovery compared to past recessions. These individuals might be classified into a new category: the new poor. They have long been accustomed to middle class life because of their previous employment. Now, they are relying exclusively on public assistance to see them through.

However, even the social safety nets in place are showing severe signs of stress. The unemployed may potentially rely on public services for years to come unless their situation improves. It is estimated that 2.7 million people will lose their unemployment checks by April unless it is extended. Without it, social organizations will be strained under the weight of its responsibilities.

Another disturbing figure is that the number of individuals unemployed for six months or longer is at its largest since 1948, when the government started tracking. They are now composed of 6.3 million people. Men have suffered the brunt of the recession. However, women between the ages of 45 to 64 were also severely affected.

Scarcity of Jobs

The scarcity of jobs even during recovery can be attributed to a range of factors. Some are already embedded in the modern economy. Majority of large businesses are now owned by institutional investors looking for fast profit, usually done by shedding staff. In addition, the manufacturing and some white-collar work have been outsourced to Latin America and Asia. A lot of companies are also hiring temporary staff and part-time workers.

Economic recessions usually forces people out of the middle class. Once recovery starts though, most will recover. In today’s case though, economists think that it will be difference. The economy will need to generate at least 100,000 new jobs in a month just to absorb new entrants. But with over 15 million people officially jobless right now, even a vigorous recovery will leave most unemployed.

VAT: The Stop-Gap Solution?

A close look at the American budget deficit reveals disturbing facts. The future seems to be hurling towards a fiscal trap wherein there is no other recourse but to increase taxes or implement value-added tax (VAT). As a very unpopular issue though, no one wants to discuss taxes, particularly not when it’s their political careers on the line. There are several figures that had championed these initiatives though particularly Nancy Pelosi for VAT and Mike Huckabee for the replacement of income tax with levy.

However, on the whole, VAT and any increases in any type of tax remains as a favorite topic among think tanks and the academic community. The administration’s budget chief Peter Orszag has already dismissed these ideas as “popular with academics but not seriously considered by policy makers”. This isn’t necessarily good news for Americans.

Most people in the United States only have a vague idea of what it entails. And even if they learn more about it, they most likely wouldn’t want it because it goes against the current American model. It is more closely associated with the social democracies in Europe. This may no longer be an option though. The sheer largeness of the deficit in the economy makes it inevitable for the country to eventually adopt VAT.

Basically, VAT can be likened to the sales tax that is currently in place. However, if the sales tax is passed exclusively to the end-customer, the VAT puts a tax on everything used, whether products or service, during the production process. It is a tax on consumption.

One of its advantages is its virtual fraud-free feature. On the negative side, VAT is viewed as a regressive tax. Lower-earners tend to pay a larger percentage of their incomes into VAT compared to wealthier individuals. For this measure to become unnecessary, either one of these two need to occur: dramatically high growth rates or substantially decreased government spending.

The former is not likely to happen given the slow recovery. And the Obama administrated doesn’t seem keen on the latter if the new budget is any indication. With this being the case, it seems that VAT will really become America’s destiny.

Career Expectations for 2010

Having career problems is nothing new but the issue is exacerbated by the pressures from the economy and difficult business environment today. So people who are discontented with their job and how their career is going are instead counting themselves lucky that they’re not one of the millions that fall under the unemployed category.

Whatever your situation is right now, there is still comfort in knowing what the future has in store. In 2010, industry experts predict that the following will happen:

Wild Card – While everything looks on track economically, changes in critical industry such as oil and gas can change things quickly. If energy prices increases sharply this year, business and consumer spending will be affected. In turn, pay freezes and hiring freezes are likely to occur.

Expansion in Some Industries – The same fields that held stable during the recession will expand in 2010. Some industries include education, healthcare, and technology. This may help raise the salaries of workers within these sectors.

It is also important to watch out for the average weekly work hour your employer requires from you. When the crisis hit, a lot of employers decided to work hours instead of laying-off people. If this is the case for you, watch out for a boost in your working hours. Once this happens, the company will soon increase your pay or start hiring again.

In the meantime, be sure to do what it takes to keep your job. This is because unless you have a highly in-demand technical skill, everyone is a lay-off target. Ensure that your position is cemented by “flying above radar.” Gone are the days when simply working hard and minding your own business is good enough. Now, visibility is the key. Excel in what you do and let others know that you’re good as well.

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