Trump may like to say he’s ‘draining the swamp’ in Washington, D.C., but he’s apparently doing little to bail out consumer appetite for spending – and building up debt.

RISING CREDIT CARD DEBTS.    Just last week, the Federal Reserve reported that Americans now owe $1 trillion in credit card debt, with an average monthly balance of about $9,600 for borrowers who don’t pay their cards in full each month. This means that 3 categories of consumer debt – credit card, auto, and student – each exceeds $1 trillion. That might sound bullish for the economy, until one considers that defaults in all 3 categories are rising. So, what’s the likely impact on credit card debt holders:

One year ago, a credit card holder making only minimum monthly payments paid out about $1185 in annual interest. After last month’s boost in interest rates, that same CC holder is now paying $1,254 in annual interest – an increase of $69. With 2 more projected interest rate hikes, that figure could rise to $1,301 a year - a $116 increase that just might be the ‘straw that breaks the camel’s (consumer’s) back’.  [NYPost] 

SECURITIES BASED LOANS.    Another category of consumer debt that has financial insiders worried is securities-based loans. Securities-based lending, or securities-based borrowing, essentially means using one's investments as collateral to secure a loan. It is also known as "non-purpose lending," presumably because the loan proceeds can be used for a variety of purposes such as buying real estate, purchasing personal property like jewelry or a sports car, or investing in a business. SBLs cannot, however, be used to buy securities or to pay down a margin loan.

SBL became increasingly big business for broker-dealers and banks in the United States during the latter phase of the bull market that commenced in 2009, as share prices reached all-time highs and interest rates held at record lows for an extended period. While securities-based lending has benefits for both the borrower and lender, the risks are skewed towards the borrower.  [Investopedia]

While SBL’s offer borrowers several benefits - e.g., lower interest rates, flexible payment terms, access to substantial amounts of money - they bear several drawbacks that fall principally upon the borrower:  

• Forced liquidation - similar to margin calls, if and when collateral values plunge below the minimum balance required.
• Double-whammy - using volatile assets like stocks as collateral may be an effective strategy during an economic boom. But in recessionary times, a broad-based decline in values or prices can whack both collateral (securities) and invested assets ( e.g., a vacation home).
• Over-leveraging: A loan obtained by pledging securities is still a loan that has to be repaid at some time. Using leverage can be an issue if the loan is used to purchase a non-productive asset or finance a lifestyle, especially if the borrower already has a substantial amount of debt. It’s this 3rd drawback that leads some experts to suggest that consumers should simply sell securities to meet their expenses – particularly when they're nearing retirement.