In today’s debt-driven society, effective financial management is key. Consider the burgeoning household debt levels in the United Kingdom and the United States as cases in point. For example, Bloomberg Markets recently reported that US household debt surpassed $12.8 trillion in Q2 2017.
Increases to US household debt came from gains in mortgage-related debt, credit card debt, automobile debt, and student loan debt among others. A steady increase in mortgage debt has been taking place since 2012, and this trend looks set to continue as the US economy slowly starts to improve. However, a caveat is in order: the short to medium-term benefits of increasing household debt and the prognosis for macroeconomic stability do not work in tandem with one another.
According to the International Monetary Fund’s Global Financial Stability Report (GFSR), central banks around the world are now facing a tough decision: how to increase economic growth without increasing the debt burden. Already, interest rates in the US, UK and Europe are at multi-decade lows, despite modest increases in the federal funds rate, the UK bank rate (rate hikes are likely in 2018), and across Europe with a tapering of quantitative easing. Regardless, the debt burden across Western society is growing.
Central banks are faced with an unenviable challenge: tightening monetary policy will place undue pressure on household debt burdens. Since increased interest rates result in higher debt burdens, a fine balancing act needs to take place. Ideally, the debt burden would be best served by decreasing unemployment levels, increasing productivity, exports and career advancement. These insuperable economic challenges remain the bugbears of economies the world over. Since the global financial crisis of 2008/2009, household debt levels have steadily been growing. This is true in EM economies as well as advanced economies.
For example, the G-8 countries (US, Japan, Russia, Italy, Germany, The United Kingdom, France, Canada) are characterized by rising levels of Debt/GDP, with numbers as high as 63% being reported. In emerging market economies, there is also a tendency towards increasing Debt/GDP levels with the average hovering around 21%.
The International Monetary Fund (IMF) does not have an elixir to the global macroeconomic dilemma of rising household debt, but it has stressed caution from central banks. This comes in the form of credit supply quotas, stringent loan requirements and limitations on credit growth at banks and financial institutions. By capping credit supply, household debt levels can be better controlled. The flipside of the coin is that household debt fuels GDP growth through the consumer demand component.
Deriving maximum yield from credit card utilization
Household debt is divided up into traditionally good debt such as mortgages, student loans and bad debt such as unchecked credit card debt. However, it’s important to stress that credit card debt in and of itself is not necessarily bad if it is managed correctly.
Wanton expenditure on credit cards without a plan to repay that debt is foolhardy. It is also important to evaluate the types of expenses that are made on credit cards, since most of it is discretionary spending on entertainment and not necessities.
However, there are ways to use credit cards effectively to gain more benefits from them. For example, the ideal situation is to use a credit card with rewards points, cash back and category-specific promotional deals to benefit from credit card utilization.
As a case in point, consider the following example: A new homeowner has $5,000 available in his/her savings account, and a 2% cash back credit card is available as well. If the credit card company offers a 10% promo discount on home renovations materials/supplies/equipment for a limited time offer, it behooves the homeowner to use the credit card to make those purchases, receive the discount, enjoy the cash back and pay off the entire credit card balance in full using the $5,000 in the savings account.
This is one of the most effective ways to use credit cards to your advantage. While many people do not have a slush fund available to repay credit cards in full every month, it is possible to repay more than the minimum amount due and still derive benefit from using the credit card.
When picking one card over another, there are various types of credit cards that need to be considered. These include credit cards for people with bad credit, instant approval credit cards, cash back cards, reward cards, airline credit cards, balance transfer cards, student credit cards, business credit cards, and low interest credit cards.
Be advised that the current trend with interest rates is increasing. The Fed FOMC is likely to hike the federal funds rate by 25-basis points on Wednesday, December 13, 2017. When rate hikes kick in, the interest repayments on credit cards will also start increasing.
That’s why it is important to lock in the lowest possible rates on your credit cards by using credit card aggregator comparison sites to make the right decisions. Currently, the national average credit card rate is 16.15%, with low interest cards at 12.89% and bad credit rates at 23.46%. The APR needs to be checked to ensure that you are paying as little as possible for your borrowed money.
By selecting a credit card with a low interest rate, you will dramatically reduce your overall household debt burden, and be able to put more money towards savings, your mortgage, or student loan debt. For more tips on reading your credit report, this is a good resource.