How to manage credit and financial risk in an unstable economy

How to manage credit and financial risk in an unstable economy

I recently interviewed Sundeep Yerapotina, Chief Risk Officer (CRO
CRO
) for Rewards Branded Cards at Citi, who is a personal finance and credit risk management expert on how people can manage credit and financial risk in today’s volatile marketplace.

What advice do you have for consumers in the current context? Advice on managing their existing debt or for those considering taking out new loans?

On the positive side, many consumers and households could take advantage of the low mortgage rates until a few months ago to refinance their existing home loans or buy new homes. With those rates locked in for the next 30 years, that certainly puts those households in a good position in terms of their monthly repayment burden.

Now, it is crucial that consumers re-examine their household balance sheets to account for higher expenses due to inflation, but also begin to account for higher repayment charges on their existing variable rate loans and future loans. while planning for any disruption to their revenue streams. in the near future.

Given the high probability of a recession in the next year, consumers should strive to build enough savings to sustain the loss of income for three or four quarters.

From a credit management perspective, consumers must first categorize their existing debt according to the nature of credit and interest rates. Debts with variable interest rates or high interest rates, such as credit cards, should be considered first. Consumers should explore options for consolidating these debts into a low-rate, fixed loan so they can ease their repayment burden. Considering the appreciation in the value of homes, it may be a good idea to take out a home equity line of credit at a favorable rate to consolidate these debts. Second, consumers should reduce discretionary spending and delay personal projects, such as non-essential home renovations, that require additional credit. Finally, there are some credit decisions we may not be able to delay, such as taking out a student loan for a child’s education or a loan for medical emergencies. Consumers should plan to refinance these loans when interest rates drop in the future.

From your point of view, what are the medium and long-term risks to monitor?

That’s an excellent 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 conflict will be key to maintaining focus on economic progress and other looming challenges facing the country, such as climate change.
  2. Sovereign debt: With our national debt exceeding $31 trillion and reaching over 120% of GDP, the government and central bank response after the onset and in the aftermath of the next recession, and longer term, will be critical.
  3. Sustained trade deficit: The sustained trade deficit in the United States is hurting the entire economy and in particular the country’s middle class due to the long-term trend of job loss in many industries, stagnant wages and real incomes, to the decline in the commercial competitiveness of American industry and to changes in the balance of power with the main trading partners.
  4. Climate change: The disruption that climate change is causing to human living conditions and economic problems requires urgent action. Not to mention its severe impact on our natural ecosystems as well as on the fauna and flora.
  5. Inflationary pressure due to natural resource supply constraints: I believe the answer lies in continuous innovation in addition to changing living standards.
  6. Social and political division: Wealth disparity and economic pressure on the working class will continue to create new differences in views on various topics among segments of our society. The deepening of the schism will limit consensus on key policy measures. The lack of long-term direction and determined action, for example, on the issues mentioned above, will only increase these risks.

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