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Not to be trite, but it’s not a stretch to say the U.S economy has been in a “weird” place for several years. There was two consecutive quarters of GDP contraction, but somehow that wasn’t a recession. Employment is nearly full, but there are inklings layoffs are moving in the wrong direction.
Inflation has taken a clear toll since 2021, but many economists point to recent ebbing of that as positive while ignoring the havoc wrought in 2021, 2022 and for much of last year. Point is, depending on one’s chose ideology or narrative of choice, a case can be made the economy is strong or the opposite.
Those in the doubting Thomas camp have support of their argument in the form of consumer credit. Not only did the national average credit score fall to start 2024 for the first time a decade, but auto loan and credit card delinquencies are at record highs.
That could imply some consumers have been bitten by inflation and surprise expenses to the point that they’re focusing on essentials – food, shelter, etc. – and forgoing other obligations. That should be a last resort option and advisors should articulate to clients that this juice isn’t worth the squeeze.
Credit Consequences Need to Be Discussed
The old phrase penny-wises/pound-foolish is applicable in the scenario in which a consumer ditches a credit card payment thinking they’re saving money. In essence, they are doing the opposite. Not only are they still liable for that payment, but now they’re on the hook for a late fee. Not to mention the long-term damage done to their credit scores. As the chart below, courtesy of MyFICO, indicates, payment history is the most important factor in a credit score.
Compounding the late payment woes isn’t just the point that delinquency rates soared last year, the number of payments 90 days or past due did the same, according to the Federal Reserve Bank of New York found.
Advisors can help clients understand that the longer a payment is outstanding, the worse it is for their credit scores. Some creditors might look past a single payment that’s 30 days overdue, but when 60 and 90 days overdue is reached, the consequences (diminished access to credit) increase.
Understanding “Good” Credit
The typical view of credit scores is that 670 out of 850 is “good”, 740 to 799 is “very good” and 800 and beyond is “excellent.” However, the reality is many lenders aren’t going to extend the best rates to those in 670 to 700 range. In fact, some folks with those scores may be denied credit altogether.
That highlights the importance of tending to one’s credit score because due to high interest rates, the AVERAGE interest rate on a credit card is 20% and the number of $1,000-plus monthly auto payments is at an all-time high.
Bottom line: An ounce of prevention is worth a pound of cure in the world of consumer and advisors can help clients with that prevention.
Related: Wealth and Well-being: Debunking the Myth that Money Guarantees Happiness