Money Lessons from the Pandemic – Managing Debt
The COVID-19 crisis has brought widespread change to the financial landscape. What lessons are we learning from these changes, and how are we applying them to our lives?
Brian Lidington, Senior Product Manager, VP – Direct Collateral Lending at KeyBank, shares three money lessons on managing debt that people are learning, as well as actions they are taking with this knowledge.
This article is one in a series, “Money Lessons from the Pandemic,” focusing on learnings people are taking away in three financial areas: homeownership, managing debt, and saving and spending.
Money Lesson 1: Address Your Debt
The pandemic has caused many of us to realize we are carrying unwanted and unnecessarily high interest rate debt, according to Lidington, and that we must tackle it. “More people are saying, ‘I have a debt problem. I need to address it. I need to take action on that debt and make it as cheap and affordable as possible,’” he said. “That means removing it from whatever type of loan it’s currently in and transferring it into something much more cost-effective and efficient.”
Applying the lesson:
- Refinance your mortgage loan. For those people with mortgage loans, one way to reduce debt is to refinance when interest rates are low and can save you money, Lidington said. Key and other banks are seeing a spike in mortgage loan refinances, as rates are at levels never seen before. “Say I have a $1,300 mortgage payment because I’m paying 5% on my mortgage,” he said. “If I can borrow at 3% and refinance at $1,000, that just freed up $300. That’s a tactic that people are proactively taking.”
“More people are saying, ‘I have a debt problem. I need to address it. I need to take action on that debt and make it as cheap and affordable as possible.’” – Brian Lidington, KeyBank
Money Lesson 2: If You Have a Problem with Credit Card Borrowing, Work on It
As the pandemic has highlighted debt issues, Lidington pointed out, it has especially underscored one type: credit card debt. “The reality is, the vast majority of people know what they take home every week or month,” he said. “And they kind of loosely know what they’re spending. It’s mortgage. It’s rent. It could be a car or two. Student loans. And then there is other consumer debt, which is largely credit cards.”
He continued, “Unfortunately, we’ve been overspending, which has created a consumer debt problem. American credit card debt is now over $1 trillion. That’s a very expensive way to borrow money. It’s a problem for certain people – they need to start finding solutions to this, and look at options to improve their own relative cash flow.”
Applying the lesson:
- Watch the spending. People are taking care not to overspend, take on debt or buy things they can’t afford, Lidington said. “They are looking at their existing debts, and looking at options to repay this debt in a manner that is more affordable to them. Rather than taking on more debt, they’re looking at existing debt and figuring out what they should do now.”
- Consolidate. One scenario for attacking debt is to increase your income. If that’s not possible, then reduce what goes out, he said. “And part of the outflow improvement is consolidating debt and getting out of those credit card problems.” Consolidating card debt into a personal loan, he noted, can offer the option for a debt consolidation – to roll debt from a high-cost borrowing vehicle, such as credit cards, to the lower-cost personal loan.
Money Lesson 3: Build up Those Savings
The COVID-19 crisis triggered a steep rise in unemployment – which, for many, has clarified how our savings are lacking. “It’s paycheck-to-paycheck in large segments of the population,” Lidington said. “And when the paycheck ends, there isn’t a plan B. People have woken up to that.”
Applying the lesson:
- Create a budget. To build that all-important financial cushion, some people are turning – or rededicating themselves – to budget planning. Lidington encouraged building a budgeting model, even if it’s rudimentary: “Understand your expenses – monthly payments being spent to run your household – and start illustrating line item by line item, ‘Where do my fixed costs go, and how do I go about either eliminating them or reducing them? Do I really need 100 Mbps internet access? Maybe not. If I drop it to 25 Mbps, what does that do to the cost?’ Rinse and repeat for every expense.”
Recommendations from the Expert
Brian Lidington offered these takeaways on managing debt in the time of COVID-19.
- The more proactive you can be, the better.
Consumers operating proactively will be to everyone’s advantage, especially in trying times, he said. “Try to prepare yourself for any unexpected events, so that if they happen, there is a ‘plan B’ to fall back on. Historically, a lot of people haven’t been thinking about unforeseen occurrences. They should try to have a different mindset – the COVID-19 pandemic is forcing people to be proactive rather than reactive.”
- Learn your options.
“If I’m paying $800 to service $20,000 in credit card debt, there are better options out there, and everyone should look at pursuing them,” he said.
- Meet with a professional.
The financial issues people are facing during the COVID-19 crisis are foundational problems that many of us have, Lidington said. “We’re looking for advice and solutions to improve our situations.” A smart step to improved financial wellness is to speak with your banker.