How to navigate credit and financial risk in an unstable economy

I recently interviewed Sundeep Yerapotina, Chief Risk Officer (CRO
CRO
) of Citi’s Rewards branded cards, a personal finance and credit risk management expert on how people handle credit and financial risks in today’s uncertain market.

What is your advice to consumers in the current environment? Any advice on managing their existing debt or for those planning to take out new loans?

On the plus side, many consumers and families can take advantage of lower mortgage rates even a few months back to refinance their existing mortgages or purchase new homes. With those rates locked in for the next 30 years, it certainly puts these families in good stead in terms of the monthly payment burden.

Now, it is crucial for consumers to re-examine their household budgets to account for higher expenses as a result of inflation but also to start calculating higher repayment burdens on their current variable rate loans and future loans while also planning for any disruption to their income streams in the near future.

With the high probability of a recession over the next year, consumers should strive to build enough savings to withstand the loss in their income for up to three or four quarters.

From a credit management perspective, consumers first need to classify their existing debt based on the nature of credit and interest rates. You should pay attention first to debt that has a variable interest rate or high interest rates, such as credit cards. Consumers should explore options to consolidate these debts into a fixed low interest loan so that they can reduce the burden of repayment. Given the rising value of homes, it may be wise to take out a home equity line of credit at an affordable price to consolidate this debt. Second, consumers should cut discretionary spending and delay personal projects, such as nonessential home remodeling, that require access to additional credit. Finally, there are some credit decisions that we may not be able to delay, for example, obtaining a student loan for a child’s education or a loan for medical emergencies. Consumers should plan to refinance those loans when interest rates drop in the future.

In your view, what are some medium to long term risks to watch out for?

It’s a great question. The US economy faces some medium to long term risks. In my opinion, here are some of the main risks:

  1. Geopolitical tensions: Diplomacy and de-escalation of political conflicts will be vital to maintaining focus on economic progress and other imminent challenges facing the country such as climate change.
  2. Sovereign debt: With our national debt exceeding $31 trillion and reaching more than 120% of GDP, the government and central bank response after the start and aftermath of the next recession, and over the longer term, will be critical.
  3. Persistent trade deficit: The continuing trade deficit of the United States hurts the overall economy and especially the middle class of the country due to the long-term trend of job losses in many industries, stagnation in wages and real incomes, the decline in the trade competitiveness of the American industry, and the shifts in the United States. Balance of power with major trading partners.
  4. Climate change: Disrupting climate change causes human living conditions and economic dilemmas that require urgent action. Not to mention its severe impact on our natural ecosystems, flora and fauna.
  5. Inflationary Pressure Due to Supply Constraints of Natural Resources: I believe the answer lies in continuous innovation as well as the evolution of living standards.
  6. Social and political division: Wealth inequality and economic pressure on the working class will continue to create more differences in views on various topics among segments of our society. A deep divide will reduce consensus on key policy measures. A lack of long-term focus and determined action, for example, on the above issues will only increase these risks.

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