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Do negative interest rates impact consumers?

| July 9, 2020 1:00 AM

If you are a saver and have any money in a savings account at your bank, you have probably noticed that in a low-interest-rate environment you are earning next to nothing on your money. But what happens when interest rates go negative? Some countries like Denmark, Japan and Sweden have already seen negative interest rates and some believe that it is only a matter of time before the U.S. sees this trend as well.

Negative interest rates don’t necessarily mean that borrowers will get paid to borrow money from the lender. You might also think that negative interest rates don’t really affect banks but they can because big financial houses that need to find a place to put $100 million even for a short period of time will need to pay to have someone hold that money.

In this current low-to-negative-interest-rate environment, bank profit margins suffer so how do banks make money in such an environment? They will reduce the interest rates on deposits they pay to customers on their savings account to zero or nearly so and they increase fees they can charge.

When customers open an account, they sign an agreement that states that the bank can unilaterally increase fees without permission. For example, if you need to order checks, the fee for those checks may increase dramatically as well as any monthly fees as your level of deposits go below a certain level.

In an attempt to keep financial markets stable and make borrowing costs as low as possible for businesses and consumers, the Federal Reserve has set the target fed funds rate at 0% to .25%. So there isn’t much room to go in the downward direction, until negative interest rates are achieved.

So what can you do? Know what the fee structure is at your bank and what account balances you need to maintain in order to avoid the fees. It is likely that the balance requirements will go up in order to keep your fees down.

The idea is to cause the consumer enough pain so he is motivated to spend and take out loans rather than save and hoard money. Bottom line is negative interest rates are typically used by governments as a tool to stimulate the economy but savers will feel the pinch.

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Three reasons you should keep old credit card accounts open

If you have an old credit card that you no longer use, there are several reasons why you might want to consider keeping the account open. Unlike old bank accounts and investment accounts, credit cards can actually help you increase your credit score.

Here are three reasons to consider keeping the account active: 1. Credit utilization. Most experts agree that you should use less than 30% of your available credit across all your open accounts So if you keep an old account open that you no longer use, this can improve your overall credit utilization and possibly keep you under the 30% ideal threshold; 2. Average age of credit. Lenders look at consumers who have managed credit well over long periods of time. That means the average age of your credit accounts is another factor used to calculate your credit score. While the impact of this category isn’t as great as credit utilization, it can still help lift your score; 3. Account Mix. A diverse set of accounts can demonstrate to credit card companies that you are responsible. As long as you pay on time and in full, more accounts are better for your credit score. That said, don’t open up new accounts or take out loans just to increase your credit score.

If you would like to keep your dormant accounts open, there are a couple of ways to achieve this. Since card issuers can close an account due to inactivity, it’s a good idea to use the card every six months. Also, you could use these cards to make small recurring purchases on the card. If you set up automatic payments, you won’t have to worry about paying the reoccurring bill. You’ll want to watch the statements to make sure no unauthorized charges show up on the account.

If you can manage credit well, these strategies make sense. However, if you have spending issues or you get charged a large annual fee then it might make sense to close the account. The credit card retention department can help you downgrade a card to reduce annual fees if you chose that option.

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Idaho faring better than other states during Coronavirus

According to a May Bankrate Housing Hardship Index, Idaho is one of the states faring better than many other states during the pandemic. For example, some of the hardest hit states have mortgage delinquency rates over 10% while Idaho’s is 4.29%. Also the unemployment rate, according to the Department of Labor in Idaho is 8.9% while other harder-hit states have unemployment rates around 25%.

Those states hardest hit are largely in the entertainment and leisure/tourism industries like Hawaii and Nevada. Also, as people from other states are attracted to Idaho, this will help real estate values move in an upward direction.

While these numbers might seem encouraging, we need to keep in mind as consumers that as this year may see the worst unemployment now, 2021 will likely bring more mortgage delinquencies and defaults if unemployment remains elevated for an extended period of time due to lockdowns.

To help homeowners navigate through turbulent times, Fannie Mae and Freddie Mac and the Federal Housing Administration have unveiled forbearance programs that allow borrowers to miss up to a year of payments without penalties.

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Remember: I’m on your side.

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If you have encountered a consumer issue that you have questions about or think our readers should know about, please send me an email at terridickersonadvocate@gmail.com or call me at 208-274-4458. As The CDA Press Consumer Gal, I’m here to help. I’m a copywriter working with businesses on marketing strategy, a columnist, a veterans advocate and a consumer advocate living in Coeur d’Alene.

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