Consumer confidence plunged in February 2025

The University of Michigan’s Index of Consumer Sentiment dropped by 9.8% in February. All five components that comprise the Index fell during the month, led by a 19% drop in the outlook for buying durable goods. Those are big-ticket items such as cars, furniture, and appliances. Consumer assessment of current conditions fell by 12.5%, while expectations for the future fell by 7.9%. One thing in particular that is weighing on consumers is a rising expectation for inflation. Inflation expectations rose from 3.3% to 4.3%. That was the second consecutive sizeable monthly rise in inflation expectations. See details at UMich.edu.

Federal court blocks student loan payment assistance program

A Federal appeals court has disallowed a federal student loan program, the Saving on a Valuable Education (SAVE) plan. The SAVE plan was created during the Biden administration. It was designed to reduce monthly payments for low-to-middle-income borrowers. It was intended to be even more affordable than other income-based repayment plans. Future payment requirements for borrowers who opted for the SAVE plan will remain uncertain until the Department of Education issues revised guidelines in response to the recent ruling. See article at MSN.com.

Student loan delinquencies to hit some credit scores soon

Student loan payments resumed last fall after a pandemic-era pause, and now students who have failed to make those payments will start being reported to credit bureaus as delinquent. According to a VantageScore report, the end of the forbearance period affected 22 million student loan borrowers, and 43% are thought to be behind on their payments. Those delinquent borrowers could see declines in their credit scores of as much as 129 points. In contrast, borrowers who have resumed payments may see a modest benefit to credit scores of up to 8 points. See details at VantageScore.com.

House Majority Leader threatens to cancel oversight of fintechs

House Majority Leader Steve Scalise has targeted recent regulation of payment services like Zelle for reversal. Late last year, the Consumer Financial Protection Bureau (CFPB) ruled that apps such as Apple Pay, Google Pay, and Venmo would be subject to the CFPB’s supervision. Though these financial technology companies are not formally registered as banks, the CFPB’s view was that they provide bank-like services. Therefore, they should be subject to the same oversights as banks to protect the public. However, Scalise and some other lawmakers want those fintechs to remain free to operate as they choose. See article at Yahoo.com.

FDIC reports generally stable conditions for banks

The Federal Deposit Insurance Corporation (FDIC)  released its report on the banking industry for the fourth quarter and calendar 2024. The FDIC reported generally solid financial conditions for banks, with modest loan growth for the year despite a decline in the first quarter. Deposit growth was higher in 2024 than in 2023. Net interest income improved later in the year. Concerns cited included elevated unrealized losses due to a rise in long-term interest rates late in 2024. Also, while asset quality is generally good, there are exceptions that the FDIC is monitoring closely. See full report at FDIC.gov.

2024 Q4 economic growth stronger than previously thought

The Bureau of Economic Analysis released its second Gross Domestic Product (GDP) estimate for the fourth quarter of 2024. This new estimate is a little shy of 0.1% higher than the advance estimate released last month. GDP grew at an inflation-adjusted annual rate of 2.3% during the quarter, bringing economic growth to 2.8% in 2024. With the increase during the fourth quarter, GDP has grown for 11 straight calendar quarters. See details at BEA.gov. 

Serious delinquency rates increased in January 2025

Consumers are falling further behind on their debt payments, according to the latest credit industry snapshot from TransUnion. Delinquency rates rose for mortgages, auto loans, credit cards, and personal loans. Average balances owed declined for credit card accounts but increased for mortgages and personal loans. See report at TransUnion.com. 

Mortgage rates continue to descend

30-year mortgage rates fell for a sixth week in a row. 15-year mortgage rates have fallen for five of the past six weeks. Over the past six weeks, 30-year rates have fallen by a total of 0.28% to reach 6.76%. During the same period, 15-year rates have fallen by a total of 0.33%, which brings them to 5.94%. However, the recent easing of rates still hasn’t come close to negating the steep rise that preceded it. 30-year rates remain 0.68% higher than at the end of September 2024, while 15-year rates are now 0.79% above that low point. See rate data at FreddieMac.com.

All weekly news headlines from Credit Sesame

• Last week’s news roundup February 22, 2025
• Next week’s news roundup March 8, 2025
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The economy has had a nice run since the pandemic. After the initial shock, fourteen of the last sixteen calendar quarters have seen GDP growth. Employment has grown for 44 consecutive months.

It would have been wise for consumers to use these favorable conditions to pay down debt and bolster savings. Instead, they have been spending like the party would never end. That leaves many ill-prepared for what may come next.

Most areas of the U.S. are no longer growing economically

While the economy continued to grow throughout the first half of the year, the third quarter may not be going so well. The recently released Federal Reserve Beige Book for August 2024 suggests an economic slowdown.

The Beige Book is a compilation of reports from 12 Federal Reserve districts. This report found growth in just three of those districts. The economy was flat in four districts and declined in five.

Credit is getting tighter

A distinguishing characteristic of this economic expansion has record borrowing by consumers. If debt has fueled this expansion, slowing growth may be because the consumer is running out of gas:

• Total consumer debt has reached a record high, with credit card debt growing particularly fast. That’s especially troubling since credit card debt is more expensive than other major forms of consumer borrowing.
• The rate of serious delinquency (90 days or more overdue) on credit card debt has reached its highest level in over a dozen years.
• The charge-off rate for banks on consumer debt has reached the highest level since 2013, and the charge-off rate for credit card debt is the highest since 2011. Charge-offs are accounting adjustments banks make for debt they have been unable to collect.
• In response to the growing risk of consumer non-payment, bank loan officers have been tightening standards for credit cards for two years.

The bottom line is that credit is getting harder to come by and more expensive. That creates a headwind for the economy, not to mention making things harder for consumers with poor credit scores.

Savings and reserves are low

Credit is getting tighter, and consumers generally don’t have a lot in the way of reserves to fall back on.

Thanks to government stimulus checks and restrictions on activity, consumers built up a reserve of savings during the pandemic. A few short years later, though, they have burned through those stockpiles and dipped into other savings.

Over the past two-and-a-half years, the personal saving rate has been running at barely over half of its long-term average. Unfortunately, this is nothing new. The personal saving rate has been below its long-term average for 10 of the past 11 years.

Government stimulus may be hard to deliver

When the economy starts to slip into a recession, you could normally count on the federal government to take steps to stimulate the economy. However, the government’s actions may have a limited effect under current conditions.

The Fed is expected to start cutting interest rates soon. However, when debt levels are already at record highs, cutting rates might not encourage much more borrowing. Lenders are already getting concerned enough to tighten credit standards. In any case, it’s unclear whether more borrowing would be good.

The Federal government could ramp up spending to spur the economy. However, with the federal budget deficit already at an extreme high, it’s not clear how much more borrowing bond holders would tolerate.

Investors finance the deficit by buying US Treasury bonds. When they get concerned about the size of the deficit, they tend to sell bonds. This drives interest rates up, dragging the economy and making it more expensive for the government to borrow.

Finally, no matter who wins the upcoming election, there’s a strong possibility that dysfunction in Washington will make it difficult for the federal government to take decisive action.

Brace yourself for the economic slowdown

Americans don’t seem to realize how good the economy has been in recent years. This may leave them unprepared for the possibility of a downturn. Two things can help them prepare:

• Tighten belts and reduce spending. Paying down debt and building savings now means you go into a recession in a stronger position.
• Take care of your credit. Build up your credit score. With credit already becoming harder to get, a strong credit score may help retain access to credit on good terms.

Economically, the party may not be quite over yet, but it seems to be winding down. Unless consumers take action now, the looming economic hangover could be painful and prolonged.

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Employment growth shows new signs of weakness

Following a disappointing jobs report last month, employment for August 2024 showed a lackluster gain of just 142,000 jobs. While this is an improvement over July, it is below the average of 202,000 new jobs over the last 12 months. Also, there were major downward revisions to the initial job growth estimates for June and July. The net result is that August’s job growth represents a net rise in employment of just 56,000 over what was previously thought. See employment report at BLS.gov.

Middle-class households believe they can afford retirement

A new Transamerica Institute study of middle-class households found that most are confident they will have enough money for a comfortable retirement. The study defines the middle class as households with incomes between $50,000 and $199,999. 69% said they expect to be able to afford retirement, with 21% saying they are very confident and 48% saying they are somewhat confident. A slightly lower number (62%) say they are currently building a large enough retirement nest egg. Despite this confidence, outliving savings was found to be tied as the most common retirement fear of middle-class households. 40% said this was their greatest retirement fear, the same percentage that said they feared declining health requiring long-term care. See study at TransamericaInstitute.org.

Planned production hike delayed by OPEC+

OPEC+ nations have agreed to delay a planned oil production increase for at least two months. The OPEC+ grouping includes the oil cartel and independent oil-producing nations cooperating with the cartel on some issues. The production increase would have been a partial reversal of earlier production cuts. The delay in the production increase is an attempt to firm up oil prices after they plunged recently. Weak economic data from the world, particularly China, had caused the recent drop in oil prices. China is the world’s biggest oil importer. See article at Reuters.com.

FTC warns of student aid scam

The Federal Trade Commission has issued a consumer alert regarding a scam targeting college students. In the scam, someone will call a student pretending to be from their college’s financial office. They will claim that the student’s financial aid has fallen through, and the student needs to make an immediate payment in order to start classes. They may demand bank or credit card information. Otherwise, the scammer may demand that a payment be made in cryptocurrency or via a money transfer. This preys on students who may be inexperienced financially and anxious about not starting college off on the wrong foot. Students are advised that colleges do not demand immediate payment or sensitive information over the phone. See article at ABA.com.

New measure of debt service ratios shows larger payments

The Federal Reserve has introduced a new measure of calculating debt service ratios (DSRs) based directly on data reported to credit bureaus. DSRs measure the percentage of disposable personal income comprising required debt payments. The higher the DSR, the greater the burden of debt payments on consumers. Under the new methodology, total DSRs are now around 12% of income. Previously, they were measured at just around 10%. Mortgage DSRs are higher under the new methodology, while DSRs for other consumer debt are lower. See article at FederalReserve.gov.

Economic growth fading in most of the United States

The Fed’s Beige Book report for August showed that only a minority of districts reported economic growth during the month. In the prior report, from mid-July 2024, most of the 12 districts included showed growth. This is now reduced to 3. The remaining nine districts had either flat or declining growth. Despite the slowing growth, employment levels were flat to slightly higher in recent weeks. Overall, the report’s lackluster view of growth supports a Fed Rate cut at its September 17-18 meeting. See details at FederalReserve.gov.

Bank profits up in the second quarter

The FDIC reported that bank profits rose 11.4% during the second quarter of 2024. Profits of FDIC-member banks totaled $71.5 billion. Declining noninterest expenses and higher noninterest revenues were the leading contributors to the increase in profits. Banks also had higher gains on the sale of securities during the quarter. In contrast to the drop in noninterest expenses, higher funding costs reduced banks’ net interest margin. Overall, higher profitability bodes well for the health of the banking system. One cautionary note was the rise in the charge-off rate. This measures debts that banks are unable to collect. The charge-off rate rose by three basis points in the quarter and by 20 basis points over the past year to reach 0.68%. This is the highest charge-off rate since 2013. See details at FDIC.gov.

Weekly news headlines from Credit Sesame

• Last week’s news roundup August 31, 2024
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It’s no surprise when a personal loan is declined because of a poor credit history. But getting rejected for a loan despite having a good credit score can be frustrating and confusing. Even individuals with excellent credit can face denials. Here are some obscure reasons why you might be turned down and what you can do about it.

Debt management missteps

There are a couple of ways your credit management habits, even with a good score, might raise red flags for lenders.

• Pyramiding Debt. This refers to the practice of repeatedly paying off existing debt with new credit. Lenders may deny your application if they see a trend indicating that you don’t have the capital to manage your debt effectively. Fix this by reducing your spending and paying down your existing debt to improve your credit utilization ratio. Demonstrating a stable income and responsible credit management will make you a more attractive candidate for new credit.
• Credit utilization maneuvers. While a low credit utilization ratio (amount of credit used compared to total limit) is ideal, drastically increasing your available credit to artificially lower your credit utilization can backfire. It might suggest that you’re constantly seeking more credit. Fix this by consulting with your lender to understand what specific actions they would like to see. This might involve paying down some of your current debt or increasing your income. If you decide to close credit accounts, prioritize closing newer ones since older accounts are more beneficial to your credit score.

Debt-to-income tightrope

The amount of credit you have access to compared to your income can also play a role in loan approvals.

• Too much available credit. Having an excessive amount of available credit with a modest income can be a concern for lenders. They worry about the potential risk of you taking on more debt than you can handle. Fix this by talking to your lender to discuss their specific concerns and see if there are ways to address them, such as reducing your credit limit on certain accounts. If increasing your income is an option, that can improve your loan application’s attractiveness in the long run.

The inactivity trap

Lenders want to see a record of responsible credit usage, not just open accounts.

• Inactive credit lines. Simply having credit cards and loans isn’t enough; they need to be active. If you haven’t used your credit cards in several months or if your loans are in deferment, lenders may view your recent credit history as insufficient to gauge your ability to repay Fix this by using your credit responsibly. Make regular payments on existing loans or use your credit cards periodically. If you need a new credit card, consider applying with local lenders, such as credit unions or your bank.

Economic downturn

Even a good credit score might not be enough in an uncertain economic climate.

• Economic factors. Sometimes, lenders might deny your application due to worsening economic conditions in your area. Even with solid credit and a stable job, lenders may be cautious about issuing loans in a volatile economic climate. Fix this by shopping around for other lenders. While multiple credit inquiries can impact your score, 2 or 3 in a year are considered normal, and any resulting dip will be temporary.

Mortgage loan blues

There are a few additional factors more specific to mortgage applications.

• Down payment shortfall. Most mortgage lenders require a down payment, typically a percentage of the property value. A lower down payment increases the lender’s risk and might lead to rejection. Fix this by saving diligently to increase your down payment. Consider delaying your home purchase to reach your target down payment amount. Explore government loan programs or down payment assistance options that might require a lower down payment.
• Savings slump. Lenders want to see a healthy amount of savings to cover closing costs and unexpected expenses. A lack of savings can raise concerns about your financial stability. Fix this by creating a budget and focusing on saving consistently. Aim to save enough to cover at least 3-6 months of living expenses in addition to closing costs.
• Employment hiccups. Stable employment and a history of consistent income are crucial for securing a mortgage. Recent job changes or gaps in employment can be red flags for lenders. Fix this if you’re self-employed by being prepared to document your income with tax returns and financial statements. Consider waiting to apply for a mortgage until you have established a consistent employment history.

Understanding these potential reasons for loan rejection can help you take steps to improve your creditworthiness and increase your chances of approval in the future.

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American consumers have record debt. Rising delinquency rates indicate an increasingly hard time keeping up with the payments on that debt. But the economy has continued to grow and foreclosures and bankruptcies are nearly 40% below pre-pandemic levels. These would appear to be sharply contrasting views of the economy. Can both be correct?

Broad national financial statistics often fail to accurately represent the financial realities faced by many consumers. While national data provides an overview of the economic landscape, it can overlook the nuances and challenges experienced by individuals in their day-to-day lives. The fact is that national statistics cover such a large number of people that the financial challenges of many individual households are not reflected by those averages. Averages may look good even when a significant number of households have serious financial problems.

While those in financial trouble may be a minority of the population, the impact is significant enough to create problems for the economy overall.

Debt problems vary considerably state by state

National averages are not good representations of the financial situation in all states. For example, Americans now owe a record amount of credit card debt. However, as the graph below shows, the picture is very different from the state with the most debt and the least debt and the national average. Credit Sesame took state-by-state data from the April 2024 TransUnion Credit Industry Snapshot and ranked the average balances from lowest to highest.

The national average credit card debt is $6,201. However, people in Wisconsin typically owe under $5,000, and people in Alaska typically owe more than $7,500. Alaskans have an average of $2,536 more credit card debt than Wisconsinans. The national average is unhelpful when considering these two states.

Another way credit conditions vary greatly by state is in the percentage of people who are seriously late on their credit card payments. This is shown by the graph below.

Nationally, 2.41% of credit card customers are 90 days or more late with their credit card payments. However, the average in Minnesota is 1.42%, and in Mississippi, it is 3.70%. People in Mississippi are more than two-and-a-half times more likely than people in Minnesota to be seriously late with their credit card payments. That represents a lot of people who see their credit scores plunge and their access to credit cut off.

National finances do not represent all ages

Federal Reserve Bank of New York’s quarterly report on Household Debt and Credit indicates that age is a big factor in keeping up with credit card payments.

Nationally, 6.86% of credit card balances are seriously overdue. However, people aged 60-69 have under 5% delinquency, whereas nearly 10% of young adults 18-29 have seriously late payments on their credit card balances. Young adults are more than twice as likely to be overdue on their credit card payments, which could cause long-lasting credit problems.

Consumers with credit problems are having serious trouble keeping up

People with low credit scores are more likely to be late with their payments than people with high scores.

Nationally, 2.41% of credit card accounts are 90+ days overdue. People with excellent credit scores of 781 to 850 (TransUnion “super prime”) have no 90+ day overdue payments. Subprime customers with scores of 600 or below have a 20.60% delinquency rate. That means slightly more than one in five subprime customers is 90 days or more overdue on their credit card payments.

The differences matter

The extreme ranges represented by economic data are important. The financial challenges experienced by people at the lower margins of the economy are very real.

The extremes of hardship represent a risk to the economy. When increasingly large numbers of people fail to repay their loans or credit card balances, it threatens the availability and cost of credit across the entire system. That’s why it’s important to look beyond the averages to understand the economy. Outlying data may be atypical, but the more extreme it is, the more reason to worry. As credit conditions deteriorate, lenders may become more and more picky about who they do business with. Even consumers who aren’t experiencing credit problems now would be wise to protect their credit history for the future.

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The end of February 2024 brought news of an upturn in the inflation rate. It also featured stories saying that the inflation rate was slowing. Both perspectives referenced the same data. How the data was interpreted is a reminder that understanding economic events can come down to an individual’s point of view.

Last week’s key inflation measure

On February 29, 2024, the Bureau of Economic Analysis released its report on Personal Income and Outlays for January 2024. This report is widely referenced for its information on consumer income and spending and data on trends in consumer prices.

Inflation has been a hot topic over the last few years, and the information on consumer prices is interesting. The BEA report includes information on the Personal Consumption Expenditures (PCE) price index. The PCE price index is significant because it is the measure of inflation that the Federal Reserve focuses on in making interest rate decisions.

The PCE price index reflects roughly the same inflation trends as the more widely-known Consumer Price Index (CPI). However, the PCE price index adjusts more rapidly to what consumers are actually buying. This is thought to reflect actual consumer behavior better. One way consumers deal with inflation is by substituting lower-priced goods for ones that have become more expensive.

The latest PCE price index data highlights that inflation had risen by 0.3% in January and by 2.4% over the past 12 months. Core inflation, which excludes the food and energy sectors, was up by 0.4% in January and by 2.8% over the past year. Core inflation is interesting because it measures how widely it has spread throughout the economy.

These numbers are not in dispute. Where opinions differ is in what they mean about the latest inflation trend.

Year-over-year inflation has slowed

One school of thought is that the numbers mean that inflation continues to slow down. This interpretation is based on the numbers for the past 12 months. The 2.4% inflation rate for the past 12 months was an improvement over the 2.6% rate for calendar year 2023. The 12-month number has fallen steadily, as illustrated by a series of recent reports on the PCE price index. Viewed this way, the trend is pretty clear: inflation is slowing. That’s good news for consumers and investors.

Recent inflation has sped up

However, not everybody sees it the same way. The 12-month numbers contain a lot of information that came out months ago. For example, the main reason the 12-month change in the PCE price index was lower through January 2024 than it was through December 2023 is that the January 2023 number dropped out of the 12-month period. The January 2024 number replaced it.

That’s significant because the January 2023 increase in the PCE price index was 0.6%, a big number for a single month. As the measurement period rolled forward, the January 2023 number was replaced by the January 2024 number. Since that more recent number was much lower (0.3%), the 12-month total went down. However, looking back 12 months doesn’t tell you what’s happened recently. Looking at the 1-month numbers for the PCE price index tells a different story. Viewed from this perspective, it seems as though inflation has been rising recently after falling to 0% in October and November 2023.

So is inflation up, or is inflation down?

The 12-month perspective may be too optimistic because it largely reflects old news rather than recent developments. However, 1-month numbers tend to jump around a lot, so it’s too soon to draw conclusions from the January 2024 number.

The bottom line is that inflation is roughly where it has been for the past several months. It has fallen but remained stubbornly above the Federal Reserve’s 2.0% target. The uptick in January is no reason for panic, but it is reason for caution. The February 2024 number, to be released toward the end of March 2024, will lend some perspective on whether that uptick was the beginning of a trend or just a one-month outlier.

What’s at stake

That need for caution may prompt the Fed to hold off cutting interest rates at its March 19-20 meeting. For consumers, that means the cost of borrowing is likely to remain high. This is a good time to rein in credit card balances and work on improving your credit score. Those moves can reduce the price you pay for high interest rates.

For investors, this is a good time to keep in mind that a lot of the stock market’s optimism is based on the belief that interest rates will come down. That may not happen as quickly as Wall Street expected a month or two ago.

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At the end of July 2023, Federal Reserve Chairman Jerome Powell announced that his economists were no longer predicting a recession. A couple of major banks also upgraded their economic forecasts. Does this mean the threat of a recession is over?

Combined with the easing of inflation, avoiding a recession would mean the economy had accomplished a soft landing. That’s where demand slows enough to cool off inflation without the economy plunging into a recession. That has been the goal of the Fed’s monetary policy over the past year-and-a-half, but it’s too early to declare victory. So far, the news is encouraging. However, there are still hazards to navigate, both in terms of inflation and a possible recession.

Economists react to good news

Fed Chair Powell stated that while his economic staff still expected the pace of economic growth to slow later this year, “given the resilience of the economy recently, they are no longer forecasting a recession.” Some major Wall Street banks are starting to see things the same way. JP Morgan Chase and Bank of America upgraded their forecasts to no longer include the probability of a recession this year.

In part, these economists are reacting to good news. The advance estimate of second-quarter economic growth from the Bureau of Economic Analysis showed Gross Domestic Product growing at a 2.4% inflation-adjusted annual rate, up from 2.0% in the first quarter. Employment grew for 31 consecutive months.

Meanwhile, on the inflation front, the Consumer Price Index rose at an annual rate of just 2.6% over the six months to the end July 2023. While not quite down to the Fed’s target of 2.0%, this marked substantial progress from the middle of 2022 when inflation was around 9%.

The progress on inflation is potentially good news for growth. It means the Fed may soon be able to stop raising interest rates, or even start to lower them. As long as inflation remains under control, this would allow the Fed to stop riding the brakes and let the economy roll.

It’s easy to see why economists are feeling more optimistic However, that doesn’t mean their optimism is correct.

Where have I heard this before?

To put the Fed’s improved economic forecast in perspective, here’s a reminder from Jeffrey S. Coons, Chief Risk Officer and Director of Institutional Services at investment management firm High Probability Advisors, “Fed Chairman Powell is currently saying the same thing that Bernanke proclaimed back in January of 2008.”

Indeed, then-Fed Chair Ben Bernanke was quoted in a January 2008 Reuters article as saying “The U.S. economy remains extraordinarily resilient.” Of course, we now know that January of 2008 was the month when the Great Recession began.

Nobody’s perfect. The point is not to second-guess Bernanke for an off-base forecast. It’s just a helpful reminder that economic forecasting is far from an exact science.

This is especially true when there are conflicting economic signals. While the economy has shown encouraging signs in terms of both sustaining growth and moderating inflation, there are still challenges on both fronts.

Threats to growth remain

In terms of growth, the economy’s run of four consecutive quarters of positive real GDP faces the following headwinds:

Debt is eating up a growing portion of household budgets

The Federal Reserve Bank of New York’s Household Debt and Credit report found that credit card debt crossed the $1 trillion mark for the first time in the second quarter of 2023. Overall consumer debt reached a record $17.06 trillion. These new highs are coming at a time when higher interest rates have made debt much more expensive. Credit card rates are up 6.25% since early 2021.

The combination of higher debt balances and rising interest rates means debt payments are taking a larger bite out of consumer budgets. The debt service ratio on non-mortgage consumer debt has risen by 17.65% over the past two years. This ratio measures debt payments as a percentage of discretionary income. After falling sharply in the first year of the pandemic, debt service ratios on non-mortgage consumer debt are now above their long-term historical average.

Tighter lending standards are making credit harder to come by

As debt burdens have increased, more and more consumers are showing signs of strain. The S&P Experian Consumer Bankcard Default index has nearly doubled since before the pandemic. New delinquencies of 90 days or more on credit cards have risen by 50% over the past year.

With borrowers heavily extended and increasingly having trouble paying their bills, lenders are responding by tightening their credit standards.

The Federal Reserve’s Senior Loan Officer Opinion Survey shows that several banks have tightened their lending standards for various forms of consumer credit recently. The Federal Reserve Bank of New York’s Credit Access survey found that rejection rates for credit applicants recently reached a 5-year high. In particular, lenders are being tough on applicants with lower credit scores, with most applications from people with credit scores of 680 or below now being rejected.

The resumption of student loan payments will force tough choices

Finally, a large unknown hangs over the economy in the form of the scheduled resumption of student loan payments later this year. A study by Oxford Economics suggests that the resumption of these payments will total over $100 billion a year. That’s money that could potentially be unavailable to consumers for other debt payments or spending.

Student borrowers could reduce those payments by signing up for an income-driven repayment plan. Historically though, borrowers have often failed to avail themselves of this option.

Each of the three factors detailed above represents a likely headwind for the economy in the months ahead. The economy has little momentum to spare, having grown sluggishly over the past year-and-a-half. So, despite the optimism of some economists, it may be too early to dismiss the possibility of a recession.

Inflation isn’t completely under control

The other component of a soft landing, getting inflation under control, is also far from a done deal. Certainly, the numbers in recent months look encouraging. But a growing number of examples of labor unrest show that workers want to catch up with the hefty price jumps of recent years. Their wage demands could spark another round of inflation.

Energy costs are also a concern. Energy is often the bell cow of inflation – and where it goes, other sectors follow.

The economy benefitted from falling energy prices for the year ending June 30. More recently though, strong demand and production cuts have caused a sharp rise in the price of oil. Since mid-year, the price of oil has jumped by 17.4%.

Looking at both growth and inflation, it’s fair to say the economy has come a long way in the past year. However, a soft landing for inflation still seems a long way off.

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The financial benefits of having a good credit score are well-established and include:

• Easier access to credit.
• Better credit card offers.
• Lower interest rates.

Since employers and landlords often check the credit reports of applicants these days, your credit score can even affect where you work and where you live.

These are all tangible financial benefits. But here’s something you can’t put a price on: good credit may give you more peace of mind.

A Credit Sesame survey found a link between credit scores and how people feel about their finances. Survey respondents with good to exceptional credit scores were generally less worried about a recession, more optimistic about the economy and better able to sleep at night.

How worried are Americans about their finances?

The Credit Sesame survey asked over 1,500 adults three questions about how they felt about the economy and their own finances:

1. Are you worried about a recession?
2. How do you feel about your financial situation?
3. How often are you kept awake worrying about money?

The results showed a fair amount of concern among consumers, regardless of credit score, about the economy and their financial outlook.

• 65% are worried about a recession.
• 61% describe their financial situation as middle of the road
• 16% are pessimistic about their financial situation (vs 23.49% optimistic)
• 47% are kept awake at night at least some of the time

Overall, these figures describe a population that is cautious but not overly fearful about the financial future. However, the responses took on a different character when segmented by credit score.

Is credit score key to how people feel?

Segmenting responses by high credit scorers (670 and higher, good to exceptional credit) and lower credit scorers (669 and under, fair to poor credit) yielded a different picture.

Recession fears are widespread, and even people with good credit scores are not immune. However, they are less worried about a recession than people with lower credit scores.

From a mental health point of view, perhaps the most important indicator is how they feel about their finances when their head hits the pillow at night. Being kept awake by money worries may affect the way people function socially and professionally.

In 2023, consumers generally are concerned about the economy. The Credit Sesame survey results indicate that concern is more prevalent among people with lower credit scores.

Does a high credit score correlate with peace of mind?

Financial knowledge and personal finance management skills often go along with a high credit score. People with a higher credit score have behaved responsibly with credit and debt in the past.

But in and of itself, a high credit score does not give peace of mind. Many other factors affect how individuals feel about their finances. For example,

• Income
• Expenses
• Debit
• Savings and investments
• Job security
• Health care costs
• Family and dependents

Consumers who understand and control all these factors as part of good financial management are more likely to have a higher credit score. In other words, having a high credit score does not guarantee peace of mind. However, having responsible habits that lead to a good credit score is likely to give you more confidence around your personal finances.

Credit improvement is a gradual process involving the development of good financial habits and does not happen overnight. But a commitment to raising your score, perhaps using a credit builder tool and by following good advice can make a difference faster than you may imagine. Your new and improved credit score could indeed come with more peace of mind around your personal finances.

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Survey methodology

The Credit Sesame Credit Health and Financial Fitness Survey December 2022 was designed and executed by Credit Sesame using the WebEngage survey tool. The survey sample comprised over 1,500 Credit Sesame members with a credit score distribution resembling the U.S. general population. In aggregate the sample data is accurate with a 2.5% margin of error using a 95% confidence level.

Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Is a good credit score key to peace of mind? appeared first on Credit Sesame.

In 2022, individuals faced new financial challenges as the global economy continued to recover from the pandemic. Inflation and interest rates rose, making credit building an even more crucial tool for achieving financial stability.

Inflation and interest rates were major drivers of the global economy in 2022. Supply chain disruptions and higher commodity prices led to a rise in inflation, resulting in higher prices across many industries. As a result, it was critical for individuals to manage their credit and spending to avoid falling into debt.

Moreover, interest rates increased as a response to inflationary pressures and the overall state of the economy. Higher interest rates made borrowing money more expensive and increased the cost of carrying debt.

What about 2023?

Why credit building is more important than ever

In 2023, credit building is even more important. Here are some reasons why:

• Higher interest rates. Interest rates remain high in 2023. This makes it more expensive to borrow money. Individuals with good credit scores are better positioned to secure loans and credit cards with lower interest rates, saving them money in the long run.
• Inflation. Although trending down, inflation is also still high in 2023 and a key factor that affects the economy and personal finance. When prices are high, it can be challenging to maintain a budget and manage expenses. Individuals with good credit scores are better positioned to access credit when needed and manage their finances in the face of rising prices.
• Economic uncertainty. Although it looks like it is improving, the economy is subject to fluctuations and uncertainty. Since the pandemic it has been particularly unpredictable. Individuals with good credit scores are better positioned to weather financial storms and navigate economic uncertainty with confidence.
• Access to credit. With lenders tightening their lending standards, a credit crunch may already be underway in 2023. This makes access to credit more challenging. Those with good credit scores are more likely to qualify for loans and credit cards, giving them greater flexibility and financial freedom.

How can individuals build and maintain good credit in the face of these challenges? Here are some tips.

• Make payments on-time every time. One of the most critical factors determining your credit score is your payment history. Make sure to pay your bills on time, every time, to demonstrate your creditworthiness.
• Keep balances low. High credit card balances can hurt your credit score and make it challenging to pay off debt. Keep balances low and aim to pay off credit cards in full each month.
• Use credit wisely. Avoid opening too many credit accounts at once and use credit for necessary expenses only. Try to keep your credit utilization rate below 30%. For example, if your credit limit is $1,000, spend under $300 on your credit card.
• Monitor your credit report. Check your credit report regularly to ensure accuracy. Dispute any errors promptly.
• Consider a credit building account. If you are starting to build credit, a credit building account can be a good option.

Credit building has always been an essential aspect of personal finance, but it became even more critical in 2022 due to inflation and rising interest rates. The economic uncertainties of 2023 mean credit building remains an essential component of responsible personal finance management.

If you enjoyed Why credit building just got more important you may like,

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Why credit building just got more important appeared first on Credit Sesame.

The task of economic policymakers is to steer the economy into an area where it is comfortably between extremes, the so-called economic Goldilocks zone. Recent news reports indicate this may be happening. However, there have also been reminders that the economy is not in the zone yet.

What is the Goldilocks zone?

The term “Goldilocks zone” is used in the context of the economy to describe a situation where economic conditions are “just right,” neither too hot (overheating) nor too cold (in a recession or depression). A state where the economy is growing steadily but not so fast as to fuel high inflation.

The term “Goldilocks zone” was used frequently to describe the economy of the late 1990s. From 1996 through 2000, real GDP growth was never lower than 3.8% and never higher than 4.8%. Inflation was never lower than 1.6% and never higher than 3.4%. The economy was never too hot nor too cold. It was just right.

The Federal Reserve defines its monetary policy goals as striking a balance between continued high employment and low inflation. In other words, many of the Fed’s decisions are around trying to find the Goldilocks zone.

Is the U.S. headed for an economic Goldilocks zone?

Recent economic growth is not as strong as during the 1990s but real GDP has grown in 12 of the past 13 years. The only exception was in 2020, the year the pandemic struck. Does this mean the economy is just right?

Unfortunately not.

Inflation has proved to be too hot. The Fed aims to keep the long-term inflation rate around 2%. But in 2021, the inflation rate surged to 7.2% and remained high at 6.4% in 2022.

The Fed has raised interest rates to cool down demand for over a year. Interest rate hikes are the classic monetary policy tool that takes some of the steam out of inflation.

However, there is a risk that suppressing demand in this may be too successful. Choking off demand too much could result in a recession.

A U.S. economic Goldilocks zone in 2023 is one where inflation steadily declines but the economy continues to grow. Recent developments indicate that the economy might be approaching the Goldilocks zone.

1. Moderate job growth

On Friday, April 7 the Bureau of Labor Statistics announced that the U.S. economy added 236,000 jobs in March.

Inflation is fueled by high labor demand. When unemployment is very low, there aren’t nearly enough workers to fill all the open jobs. That kind of labor shortage creates wage pressure.

The March employment report was a step in the right direction because it showed employment was still growing but slower than in recent months. That suggested the economy is still expanding but at a pace that shouldn’t create as much wage pressure.

2. Job openings ease

A few days before the employment report, the Bureau of Labor Statistics reported that job openings had declined.

At 9.9 million job openings, there are still plenty of opportunities for people seeking work. However, the number of job openings eased over the most recent month and is down from where it was a year ago.

That means some of the excess labor demand is starting to work itself out of the job market. That should mean less wage pressure.

3. Inflation trends down

It was recently announced that the Personal Consumption Expenditure (PCE) Price Index increased by 0.3% in February.

That represents a slowdown from January’s increase of 0.6%. This is also a slower rate of inflation than over the past year.

The PCE Price Index is especially significant because it is the inflation measure that the Federal Reserve prefers over the Consumer Price Index (CPI).

4. Consumer spending growing at a more relaxed pace

The most recent Mastercard SpendingPulse report showed that retail spending increased by 4.7% over the past year.

That represents less spending growth than the recent trend. In fact, a 4.7% increase is lower than the recent inflation rate, suggesting that consumers are buying fewer things.

Lower consumer spending should help take the edge off inflation.

Why things are not “just right” to be an economic Goldilocks zone

While there are signs that the economy is moving towards the Goldilocks zone, there are also reminders that things are not just right, yet.

1. Inflation is lower but still too high

Whether the focus is on the PCE Price Index or the CPI, inflation is slowing but still too high. The PCE Price Index rose 5.0% over the past year, and the CPI 6.0%. Both figures are above the Fed’s target of 2% inflation.

2. Debt suggests economy may be on borrowed time

While the economy is growing, consumer debt continues to set new records.

If the economy is dependent on continued borrowing growth, eventually it has to slow down. Payments on today’s borrowing will subtract from tomorrow’s growth.

3. Banking remains a wild card

The banking system is recovering from a couple of recent high-profile bank failures. The fundamental conditions that led to those failures are may cause issues at other banks.

Bank failures do more than just disrupt the financial system. They directly impact the Fed’s policy.

Fast-rising interest rates helped cause some of the mismatches between assets and liabilities on bank balance sheets. If the Fed senses rate increases are destabilizing the banking system, it may find an important inflation-fighting tool has been blunted.

4. Less oil may mean more inflation

Leading oil producers recently announced an agreement to cut output. Their goal is to drive up oil prices. This is exactly the kind of shock that could result in a fresh boost to inflation.

Are we in the economic Goldilocks zone yet?

The economy may be approaching the Goldilocks zone, but there is no fairy tale ending in sight. Economic pressures and levers over the coming months will govern whether the economy is just right or not.

If you found Is the U.S. headed for an economic Goldilocks zone? interesting, you may enjoy,

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Is the U.S. headed for an economic Goldilocks zone? appeared first on Credit Sesame.