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Wednesday, August 26, 2020

Personal Finance Trends in the Age of COVID-19


I recently attended a webinar for financial educators about Trends in Personal Finance by Next Gen Personal Finance (NGPF) founder Tim Ranzetta. The majority of the trends that were presented were informed by effects of the ongoing COVID-19 pandemic. 

Below are eleven of my key take-aways from the webinar about how the pandemic is affecting different aspects of personal finance. More trend summaries will follow in subsequent blog posts.

¨       Record Savings Rate- Americans are sitting on record cash savings amid uncertainty related to COVID-19 and the economy. The U.S. savings rate hit a record 33.5% in April and was 19% in June versus about 7.5% before the pandemic. Reasons for increased savings include reduced spending opportunities (e.g., eating out, travel, and entertainment) in a shutdown economy and precautionary savings because people do not know what the future holds.

¨       “Contactless” Credit Cards- Visa distributed 80 million contactless-enabled credit cards during the first half of 2020 in response to concerns about virus transmission. These cards allow people to make quick “tap and go” payments by tapping a card in close proximity (about 3 inches) to a contactless-enabled terminal, thereby eliminating the need for swiping a strip or dipping a chip. The front of contactless cards has an icon that looks similar to a wi-fi symbol.

¨       Lower Credit Card Limits- Banks are issuing credit cards with lower limits as they re-evaluate their lending standards in light of financial stress caused by high unemployment and other COVID-19 impacts. The average credit line fell 9% to $5,257 according the credit bureau TransUnion. Another action that many credit card companies have taken is to close inactive accounts “to avoid being a borrower’s lender of last resort” after borrowers “max out” their other credit lines.

¨       Less Credit Card Fraud- Fraud related to credit cards was down 40% during the first half of 2020 compared to the last six months of 2019. Possible reasons include less shopping traffic in physical retail stores and less information obtained through skimming (attaching a device to card readers to steal personal information, e.g., at gas station terminals) and shimming (attaching a thin microchip enabled reader into slots for chip-enabled cards) devices as people stayed home.

¨       New FICO Score- The Fair Isaac Corporation (a.k.a. FICO) introduced a new credit score called the FICO Resilience Index as an alternative measure of creditworthiness. It is intended is be a “tiebreaker” for borderline credit decisions involving borrowers with low credit scores who are still likely to repay their debt in full. Scored from 1 to 99 (1 for the most resilient borrowers), the index puts more weight on a long credit history, low credit utilization, and few credit lines.

¨       New Mortgage Refinancing Fee- With mortgage interest rates at near record lows, many homeowners are refinancing their existing mortgages. The federal agencies Fannie Mae and Freddie Mac, which hold two-thirds of all U.S. mortgages, will soon impose a 0.5% fee on refinanced loans of $125,000 or more after December 1. For example, the fee on a $300,000 refinanced mortgage will be $1,500 ($300,000 x .005), which will be added to the loan closing costs.

¨       Home Sales Spike- Sales of existing homes increased 24.7% in July from June according to the National Association of Realtors. This is a record increase. As sales increased and housing supply fell, home prices rose, with a median price of $304,100.  Reasons for the increase in home-buying include people with stable jobs gaining increased purchasing power from low interest rates and buyers relocating from cities to less densely populated suburban areas for social distancing.

¨       Surge in Online Auto Insurance Quotes- Quote requests for auto insurance increased 147% from March-August 2019 to that same time period in 2020. While people were driving less due to pandemic restrictions, they also had more time on their hands to conduct online searches and were motivated to find ways to cut household expenses.

¨       Coin Shortages- Just like toilet paper early in the pandemic, supplies of U.S. coins (all denominations) have been running low. As a result, the Federal Reserve has been forced to ration supplies to banks, which makes it difficult for banks to supply retailers to use in their cash registers. Reasons for the shortage include fewer coins produced at the U.S. mint to protect workers from COVID-19 and lockdowns at bank lobbies where coin counting machines are located.

¨       High Profile Stock Splits- Both Tesla and Apple announced upcoming stock splits in mid-August in an effort to attract a larger base of investors with a smaller amount of money to invest, by decreasing the price of their shares. Tesla’s stock split will be 5:1 and Apple’s will be 4:1 effective August 31. The value of an investor’s stock holdings remains the same after a stock split. As an example, one share of stock worth $2,000 becomes four shares worth $500 after a 4:1 split.

¨       Increased Investment Day Trading- The Robinhood investing app, which provides investors with free stock trades, experienced a record number of trades in June. It has been criticized as akin to gambling (versus long-term investing) when used by day traders who buy and sell stocks daily. Reasons for the day-trading trend include people stuck at home who are bored and/or trying to replace lost income, the stock market’s recent volatility, and a reduced number of sporting events available for online sports betting.

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