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Economists: Rising personal debt poses growing threat


BALDWIN, Georgia (CNN) -- As the U.S. Federal Reserve Board is expected to cut a key interest rate Tuesday, experts warn that increasing personal debt among U.S. consumers poses a severe threat to the nation's economy.

U.S. consumers who once saved an average of 8 percent of their take-home pay only a few years ago now spend about 1 percent more than they earn. Payments on personal debt for such things as credit cards and student loans used to consume less than 6 percent of after-tax income. Now that figure is at nearly 8 percent, the highest level in more than a decade, and still rising.

"What we have here is a dangerous mix of fast-growing debt and fast-rising unemployment that could quickly put the brakes on consumer spending," said John Lonski, chief economist, Moody's Investor Services.

Making things worse is the fact that more families are falling behind on credit card payments. The nation's delinquency rate has grown steadily to well over 5 percent, more than one account in every 19.

CNN's Brooks Jackson profiles a couple with credit problems (May 15)

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That trend is prompting more Americans to seek counseling to slash their spending in an attempt to reduce their debt. "We normally see an increase in the month of January," said Kathleen McNally of National Federation for Credit Counseling. The annual January spending hike is sometimes called the January jump. But McNally said this year's January jump is continuing into the month of May.

In April, the U.S. government reported that the nation's unemployment rate had jumped to 4.5 percent, a 2 1/2-year high. Businesses cut a stunning 223,000 jobs outside the farm sector in April -- the biggest one-month drop since February 1991, at the end of the last recession -- after cutting a revised 53,000 jobs in March, the Labor Department reported.

A half-point cut in the federal short-term interest rate, expected later Tuesday, might give the economy a boost that could reverse the nation's unemployment trend.

The Federal Reserve has been cutting rates incrementally since early January.

The Gotsch family of Baldwin, Georgia, has more than $73,000 in personal debt  

One of the victims of the slowing U.S. economy is Robert Gotsch of Baldwin, Georgia, who was laid off this month and caught with $73,000 in personal debt. Since he lost his job, Gotsch and his wife Lynna have been struggling to maintain their monthly payments.

"We have sold everything we can imagine: computers, my rollerblades," said Lynna Gotsch. "We've gone to flea markets, sold clothes, done without cable, commuted together to save gas and car expenses, and are living with family."

With no house of their own, the Gotsches live with Lynna's grandmother. Robert Gotsch said he believes he will find a job soon, and his wife also offered hopeful advice.

"Just hold on," she said. "There's hope. God's promised to provide and He will provide. And stay away from borrowing any more money."

CNN Correspondent Brooks Jackson contributed to this report.

• U.S. Federal Reserve Board
• Moody's
• National Foundation for Credit Counseling
• United States Department of Labor

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