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First, lets cover the basics and address some of these headlines – we’ve got Millions of Americans Skipping Credit Card and Car Payments, which represents users who claimed “Financial Hardship,” which allows them to defer payments, interest free, without affecting their credit score, for a pre-set period of time.
As it stands right now…the outstanding Credit Card debt isn’t looking good. At the end of 2019…Americans had accumulated $930 BILLION DOLLARS worth of credit card debt, and that works out to be an average of $5700 worth of debt per person. And, just liked you’d expect…when you break that down further, the people who have the LOWEST household net worth are the ones who have the HIGHEST amount of credit card debt, likely because they have no other option than to use a credit card….and because credit card interest rates can be ridiculously high, it makes it extremely difficult to pay off if you can only afford the minimum payments.
The CONCERN is that people dig themselves into more debt by borrowing money, as indicated by the 25% of people who have increased their credit card debt during the crisis…and, when all of this is over, unemployment still remains high, the stimulus runs out, the unemployment benefits run out…and banks are left scrambling when a portion of those people don’t pay them back.
So, really – at the end of the day…here’s where we stand, and here’s what this means:
First, having such a huge number of people requesting financial hardship assistance on their credit card is not surprising. It’s easy to do, banks have made them extremely accessible, and for anyone who’s unsure of their financial future – it makes sense to pause payments, and solidify the essentials before coming back to the credit card debt.
Second, it’s absolutely concerning that so many people have been faced with financial hardship – and, inevitably, a portion of these credit card users will be unable to repay their debts once this pause-period is up. I certainly expect default rates to climb for the time being, and a LOT of this will depend on how quickly our economy begins to stabilize once people return to work.
And third, I think the most likely outcome from this is that – for the next few years – credit cards are going to be more strict about who they give loans to, they’re going to give you less of a credit limit, and they may potentially charge slightly higher interest if they determine that too many people aren’t making their payments.
Ultimately, when used properly…credit cards can be a VERY useful tool to leverage your money, build your credit, get cash back, and travel for free – and that’s the reason I like and use them so much. But, when used as a cash advance, without the money to pay it off in full…it can be a recipe for disaster.
For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness@gmail.com
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