The Year in Credit
Sleigh bells and cash registers are ringing out across the land as the holiday shopping season unfolds. It’s an orgy of spending, spending, spending, an enthusiasm that was largely reflected by the credit industry and its actions during the year.
As the New Year approaches, let’s look back at 2016 and recap just a few of the credit highlights.
The Federal Reserve: The Fed saved its best for last, raising its prime lending rate a quarter point in December. That marked only the second time since the 2008 financial crisis that rates have been raised. What that means heading into the new year is that your credit will cost you more, taking a larger chunk out of your available cash as you strive to pay down debt. The rise in rates may be followed by three more in 2017, although predictions about what the Fed may do are like predicting who will win the Presidency – and we all know how that turned out.
Household Debt: American households have an average debt of $16,061 in credit cards, according to a report prepared by the web site NerdWallet. That’s just shy of the all-time high in household credit card debt accumulated in 2008, which was the height of the Great Recession. In total, Americans now owe an estimated $747 billion on their credit cards. Total household debt, including mortgages, comes in at a whopping average of $132,529 per household. That means that any sort of crisis – loss of a job, disability, an unexpected household expense not covered by insurance – and things will go south very quickly for a lot of Americans.
Credit Card Rates: The average credit card interest rate stands at 18.75 percent, which means that the average household pays $1,292 per year in interest alone. That’s a lot of money that’s blasting into the ether, and the rising rates by the Fed do not auger well for those carrying big debt into the new year.
Consumer Confidence: Maybe it’s whistling past the graveyard, but consumer confidence, which is a measurement of optimism on the direction of the U.S. economy, hit a nine-year high earlier this year. That means higher spending, particularly for the holidays, and a willingness to increase the debt load. That’s good for the economy and retailers, but the aftermath of every party produces a few hangovers, and that’s particularly true in a climate where interest rates are rising.
Credit Improvement: A Capital One Survey said that more than 80 percent of the 2,300 people surveyed think they will be able to improve their credit in the coming year. About 86 percent of those want to lift their credit score as part of their plan. Again, this may be a bit delusional, as taking on more debt is a formula for lowering the credit score. Either there are separate segments of the population being surveyed, or someone isn’t facing reality.
More Credit Companies Coming: Goldman Sachs has initiated a new division named Morgan that provides no-fee, fixed-rate loans up to $30,000 to select customers. They join Lending Club, Discover and a few other companies jumping into the consumer lending pool. That’s either a sign that happy days are here again, or that banks need to shore up their own finances by finding new revenue streams. What that means is that the underwriting on things like mortgages and car financing may be easing slightly from the tighter standards imposed in the dark days of the Great Recession. That can be good news for those who can manage responsibly.
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The Rise of Faux Cards: Not everyone is a trust fund baby or Arab billionaire sporting an American Express Black Card. That legendary piece of plastic requires a minimum annual spend of $250,000. But never fear – just as there are knockoff handbags being sold on the streets, savvy companies are jumping in with cards that look and act like high-prestige plastic. One such card is Select, which requires you to link an actual card to it, but has an arduous application process and turns away many requests. It’s a door-opener to high prestige events and insider discounts, they claim. And you can impress your date.
Sign-up Bonuses Are Rising: A study by personal finance web site WalletHub indicates the value of initial rewards bonuses for credit card sign-ups hit a record high in the third quarter of 2016. New applicants received an average of $101.48 in cash or more than 15,000 points or miles. Of course, getting the card and a sweet bonus usually requires you to be a prime customer with a high credit score, a sought-after consumer who will be a reliable spender and on-time payee on the bills. Plus, the relationship built by card ownership can be leveraged to get additional products in front of you.
Credit Card Growth Slowing: One of the reasons for the large bonuses is that credit card growth has been slowing, being out-stripped by debit card use. Maybe that indicates tighter standards, maybe it indicates consumers prefer to spend the cash on hand. Either way, it means banks must do more marketing to entice you to their products.
Mortgage Approvals Easing: The Federal Reserve reports that prime mortgage borrowers – those with a credit score of 740 or higher and lower than average debt-to-income ratios, are finding it easier than ever to get a mortgage approved. The good news from that is there appears to be a trickle-down effect that may make it easier for the non-prime customer. The Fed’s most recent Senior Loan Officer survey shows 11 percent of banks reported that they are easing mortgage loan standards in the last quarter, while no banks said they were tightening. While the days of no income verifications are not coming back, you may still qualify for a mortgage with a less-than-stellar financial profile.
Of course, as they tell you when you invest, past performance is no indication of the future. So, your best financial advice for the coming year is the same as it is every year: be responsible, don’t take on too much debt, be aware of your credit score, and strive to pay your bills on time. That will make you a candidate for all sorts of good returns when you’re ready and willing to move forward.
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