The following is a sponsored post by Credible, a multi-lender marketplace that enables borrowers to receive competitive loan offers from its vetted lenders. Credible is headquartered in my hometown of San Francisco, California.
The U.S. is in the midst of its longest economic expansion in history.
But when the Federal Reserve cuts interest rates, that’s usually a sign that the economy is slowing down — or worse. After raising rates nine times from 2015-18, this year the Fed has reversed course, cutting the short-term federal funds rate three times.
Another worrisome trend: New York Fed data shows the unemployment rate for recent college graduates (red line) has been inching upwards this year, suggesting employers are skittish about growth.
Booms and busts of the business cycle are pretty much accepted as a necessary tradeoff of our free-market, capitalist system — which has weathered seven recessions since the 1970s. At the very least, it is clear that growth is slowing in both developed markets and emerging markets around the world.
In a recent CNBC/SurveyMonkey poll, nearly two-thirds of Americans said they think it’s likely we’re headed for a recession next year. Close to half of those who see storm clouds on the horizon are preparing for it by cutting back on household spending and paying down debt.
“This refreshing prudence on the part of the U.S. households is, of course, exactly opposite of what macroeconomists at the Fed — as well as incumbent politicians who view lower rates as enhancing their re-election prospects — want to happen,” says former FDIC Chairwoman Sheila Bair.
Rate cuts are designed to encourage people to borrow and spend. But this time, Bair says, “it looks like American households have learned their lesson, even if Washington has not.”
The downturn has obviously arrived in 2020 thanks to the coronavirus pandemic. It unfortunately came sooner than most of us had all expected. As a result, this post is more important than ever.
It’s always a good idea to constantly be managing any outstanding debt you’re carrying, whether its credit card balances, student loans, or a mortgage.
- You’re not paying a higher interest rate than you can qualify for
- Most of your monthly payment is going toward paying down principal, rather than interest charges
- You’re prioritizing your loans with the highest interest rates
- You have a good cash balance equal to at least six months of living expenses
Let’s look at some techniques you can use to whip your credit card, student loan, and mortgage debt into shape and get better prepared for the next recession.
Refinancing Student Loans
According to the Federal Reserve, in 2019 the average college debt among student loan borrowers in America is $32,731. This is an increase of approximately 20% from 2015-2016.
Most borrowers have outstanding student loan debt of between $25,000 and $50,000. But more than 600,000 borrowers in the country have over $200,000 in student debt, and that number may increase.
Student loans are good candidates for refinancing in a falling interest rate environment, or at any time your creditworthiness has improved.
Rates on federal student loans are fixed once you take them out. But at the start of each academic year, rates for new borrowers are adjusted to take into account the government’s cost of borrowing.
Not only that, but grad students and parents pay higher rates. So it’s not unusual for many borrowers to be paying 6%, 7% or 8% interest on federal student loans.
In a falling interest rate environment, many graduates who have put together a history of earnings and credit can qualify for better rates from private lenders like SoFi, Citizens Bank, College Ave, and PenFed. Rates on student loan refinancing have also been falling.
But check rates with multiple lenders, and keep in mind you’ll lose access to federal programs like income-driven repayment if you refinance government student loans with a private lender.
If you’re refinancing a mortgage, fees can cut into the savings you can achieve by refinancing. But there are no prepayment penalties on student loans, and none of Credible’s partner lenders charge origination fees for refinancing them.
To refinance your student loans, click here to get real student loan rates from multiple private lenders.
There’s been a rush to refinance mortgages in 2019 thanks to a dip in long-term rates. But keep in mind that the Federal Reserve played a role in keeping mortgage rates down after the 2008 financial crisis.
Now the Fed wants to back out of its role in funding mortgages, so mortgage rates could head up if private investors don’t pick up the slack.
When refinancing a mortgage, you’ll have to measure the savings you can achieve if you’re able to get a lower interest rate against fees charged by the lender. You can use a “break-even” calculator to see how long it will take for your savings to cancel out any fees.
Financial Samurai recommends refinancing if you can break-even within 24 months or less and own the house for five years or more. Alternatively, look into a “no-cost refinance” where all the fees are baked into the refinance.
When shopping for mortgage refinancing, Credible provides actual rates and transparency into fees, without sharing your information with lenders. Credible has streamlined and digitized much of the mortgage application process, using smart logic that removes duplicative questions from the process and automatically gathering many of the required documents.
To refinance your mortgage, click here to get real mortgage rates from multiple private lenders. Mortgage rates have drastically declined since 2018.
Consolidating Credit Card Debt
The good news about credit card debt is your interest rate is typically indexed to the prime rate, and the prime rate follows the Fed’s short-term interest rate adjustments closely. So when the Fed is in the mood to cut rates, your credit card rates will often come down, too.
But a funny thing happened when the Fed was raising short-term rates from 2015 through 2018. Long-term rates — on government bonds, mortgages, and even personal loans — failed to keep pace. For a while, we had an inverted yield curve, when long-term rates defied logic, and were lower than short-term rates.
An inverted yield curve can be a warning signal that a recession is looming. But freakishly low long-term rates also create an opportunity to consolidate credit card debt.
At the end of the third quarter of 2019, the “spread” between interest rates on credit cards and personal loans hit an all-time high. People carrying a balance on a credit card were being charged 16.97% interest, on average. But the average rate on personal loans was only 10.07%
This huge spread has borrowers scrambling to refinance credit card debt by taking out personal loans at lower interest rates, potentially saving thousands of dollars.
As Financial Samurai has written, paying the average credit card interest rate will likely keep your poor forever. With the spread between the average credit card interest rate and the personal loan rate so large, it behooves those with credit card debt to consolidate their loans.
If you’re interested in pursuing this strategy, it’s important to get actual rates from multiple lenders. Competition for borrowers is fierce, so shopping for the best rate can pay off.
To refinance your higher credit card debt, click here to get some real personal loan quotes from multiple private lenders. Take advantage of the biggest spread in a long time.
Always Be Prepared For A Slowdown
By taking advantage of lower rates and prudently paying down debt, you will be in much better shape if the economy goes into a recession. Surviving a recession is all about having enough cash flow to make it until the inevitable recovery.
If the economy continues to roar higher, you’ll also feel great knowing that you’ve optimized your debt while concurrently making greater returns and optimizing your earnings power.
At the end of the day, you always want to create a heads you win, tails you also win scenario, no matter the economic environment.
Readers, what are you doing to prepare for a potential recession? Have you refinanced all your debt to the lowest rate possible and saved up enough cash to last you at least six months?
About Credible: Credible borrowers can compare real offers for various loan products (mortgage, student loan refi, personal loans, etc) from multiple lenders through a single form without sharing their information with lenders nor impacting their credit (and it’s free). Remember how much of a pain it was to search for flights/hotels before Kayak and Expedia? We’ve righted a similar wrong at Credible.
Credible houses its lender partners underwriting models and runs a soft credit inquiry on users, which enables us to instantaneously pre-qualify users without communicating their information to lenders. Credible is only paid if a borrower actually closes a loan with the lender, so there is no monetary risk to lenders, which makes us an attractive partner.