By John Corron, Wealth Advisor –
A read through of the New York Fed’s Q2 2020 Household Debt and Credit Report revealed some surprising changes, including:
- Overall debt held by U.S. Households has climbed steadily since 2013 to just below the Q1 2020 all-time high of $14.3 Trillion.
- Credit card balances decreased by $76 billion (largest drop since the measure has been recorded).
- Delinquencies have been steadily declining since 2009 to just under 4% of all outstanding debt. The percentage of consumers currently in collections is at its lowest level (just over 8%) since 2013 where just over 14% of consumers were on collection agency call lists.
In summary, it appears that even though Americans are borrowing more, we have been doing so more responsibly and organizing our financial houses better in recent years.
Should we read much into these stats given the uncertainty COVID has caused?
Maybe not as it is unclear how widespread and long-lasting the negative impacts of quarantine might be. How big of an impact will the various government programs to halt debt payments and delinquency/bankruptcy filings have once they expire? We will know in the months and years ahead.
One thing does make a lot of sense these days: Now is a great time to give your credit profile some attention and make sure your borrowing history and capacity is in good order if you haven’t done so already.
For many, 2020 has been a very difficult year on more fronts than any of us could have imagined. Some have lost jobs, some lost hours, some are less productive and many are losing their minds trying to find a work/life balance in their own homes!
For many others, however, quarantine has been an opportunity to focus on their financial well-being, using the savings from their inability to do and spend much to settle up some nagging debt. For the folks in this category, it’s a silver-lining to a very difficult year.
If you haven’t gone through the exercise yet, here are a few helpful steps to follow.
1. Request a credit report
Not only will you see all of your outstanding debt aggregated in one place, but you will be able to see whether there has been any strange looking activity that you don’t recognize.
You will also get a look at your credit score. If it is lower than you would expect there are a number of things you can do to improve it.
A good advisor can help you sift through the report and give you a few areas to focus on to get back on the right track.
2. Revisit your household budget
Many people have probably gone through this exercise if their income was adversely impacted by COVID fallout, but for anyone who is not in that boat and hasn’t checked in on their spending – what are you waiting for?
If your spending turns out to be down temporarily while you’re stuck at home, there may be extra dollars to put toward debt payments, building up savings or allocating to an important goal.
3. Compare interest rates on your outstanding debt
A good rule of thumb is to focus on debt with the highest interest rate on it. This will help you prioritize which loans or balances to prioritize if you have some free cash flow to put toward paying down liabilities.
4. Consider debt consolidation
Interest rates are at all-time lows in many of the places that consumers typically borrow from. If you can consolidate multiple loans into one while reducing the interest rate you are paying, it is worth considering.
5. Meditate on what you really want
I have spoken to a number of people who have combed through their credit card statements and were less-than-pleased at how off-track their spending had become.
They found ongoing subscriptions they forgot about, impulse buys they regretted making, debt loads that crept higher than they ever wanted because they were not being strategic in allocating dollars to goals they wanted to fund most.
In conclusion, 2020 has been a blessing and a curse so far.
Hopefully you have found silver linings in focusing time and energy on personal health, relationships, pursuits you care deeply about and getting a good handle on your finances.
If checking in on your personal credit health wasn’t on your to-do list, now is as good a time as any to give it some attention. With instances of fraud rising every year, it is more prudent to be proactive in identifying trouble and avoid reactively resolving issues when you need or want to use your credit most.
If you’d like an advisor to assist you during this, please get in touch with us.