Kara McGuire: Latest fad: Tightening those belts

When Christmas decorations grace department store shelves in September, it's natural to feel dread. After all, you haven't even carved a pumpkin yet and you're supposed to be thinking about Santa? But if you're feeling a little more dread than usual about the upcoming holiday season, there's reason.

From soaring energy prices to rising interest rates, powerful economic factors threaten to bring anything but joy for the holidays. Just ask the leading economic indicators -- or your neighbors. And if you really overdo it, the new bankruptcy laws that kick in tomorrow will make it harder to walk away from debts.

The University of Michigan consumer confidence index, released Friday, fell for a third month in September to its lowest level in more than 13 years. The culprits: high energy prices and the hurricanes.

But it's not all doom and gloom. For instance, retail sales rose slightly last month. And the latest real net household wealth figure, which measures assets such as real estate and 401(k)s, minus liabilities like mortgages and car loans, rose 9.4 percent. So on paper, anyway, we're richer.

All this raises the question: Is the economy really headed for trouble or are consumers reading too much into the dismal headlines? It depends on whom you ask.

Run into 28-year-old Alexis McKinnis, owner of Personal Touch Errands Service, and she'll say things are looking up. Her client list has grown and her income doubled in the past year. And because having someone else pick up your dry cleaning and shop for gifts is not what you'd call an essential service, the fact that she's landed new clients within this growing field is anecdotal evidence that some people are doing well enough to afford this convenience.

Ask 55-year-old Renee Scully about buying holiday gifts this year and she'll laugh; the money usually spent on gifts will go up the chimney this year. Her 1 percent raise and her husband's significantly smaller salary for his new factory job -- a third what he was making before being laid off as an electrical engineer -- don't come close to covering the expected 50 percent or higher jump in heating bills.

"As it is, we've had no vacation for five years. We eat less meat, spend less for groceries, clothes," she said. "We literally sit in the dark to save money."

In one respect, times are looking up for 65-year-old retired postal employee Chuck Vos and others on fixed incomes. Because the Federal Reserve has raised interest rates, investments such as money market accounts and CDs are typically paying 3 to 3.4 percent or more.

Despite this uptick in income, Vos worries that we're headed for a major depression: "Interest rates on money markets are still terrible. The stock market is terrible. Gas prices are terrible."

One point of discomfort: Vos feels squeezed by his adjustable-rate home equity line of credit. The rate ticks up each time the Fed raises rates, because banks follow suit with their loan rates.

The average balance on a home equity line of credit was $43,700 at the end of June, according to Equifax and Economy.com. Assuming a five-year payoff plan, the average borrower will pay $55 more per month at today's prime rate of 6.75 percent than in 2003, when the prime was 4 percent.

Despite the increase, Celia Chen, economist for Economy.com, reminds us that home equity is still some of the cheapest money to borrow.

Steve Adams, a 44-year-old registered nurse, refinanced his house to pay off $5,000 in credit card debt. He's not alone. According to the Fed, about a quarter of the money people take out of their homes goes to pay off credit card and consumer debt. Between one-fourth and one-third more is used to make purchases. Chen expects waning consumer confidence to crimp this kind of spending.

With both Adams' wife and son in school, plus car repairs and other expenses, more borrowing has landed right back on his credit card -- and refinancing again doesn't make sense. Says Adams, "you hate to have to use it, but it's a necessary evil."

An evil that's taken center stage in more spenders' nightmares. The latest American Bankers Association Consumer Credit Delinquency Bulletin reports that 4.81 percent of credit card accounts were late in the second quarter, up from 4.28 percent a year ago.

"People just don't save up to get things," says Tiff Worley, president of credit card counseling company Auriton Solutions. And when people do buy, "they don't think about how much it costs; they think about what the monthly payment is."

Those payments are set to change. Creditors are rejiggering their minimum payments so consumers pay down more of their account balance. That will cause discomfort for those barely making the current minimums. And if you miss your new higher payment on your Visa, then MasterCard could raise its interest rate, too, even if you paid that bill on time, a credit practice called "universal default."

Anticipating higher credit card minimums, 25-year-old Nicole Huckstadt is altering her lifestyle to afford higher card payments on top of her $50-a-week SUV gas bill. Changes include cutting out Caribou coffee, canceling her gym membership, reducing her cell phone plan and buying clothes less often.

George Singer, an attorney at Lindquist and Vennum, thinks more consumers will follow Nicole's lead and retrench. "People will think about whether paying 21.8 percent interest makes sense. That's expensive money."

Kara McGuire • 612-673-7293 • kara@startribune.com