In 2009, Ben Bernanke (the former Chairman of the Federal Reserve Bank) delivered a paramount plea to the federal government requesting the immediate signing of the Troubled Asset Relief Program (TARP). Although complex, one of the key goals of TARP would be “bailing” out a desperate Wall Street thus providing relief to the entity that, in many respects, was the catalyst for the 2008 Recession. So, as Bernanke spoke with conviction he echoed a consequence that the United States would incur should a crucial, yet often overlooked, component of the economy fail. His words were, “Credit has the ability to build a modern economy, but lack of credit has the power to destroy it.” Compelling, it would be this sentiment that pushed the signing, and ultimate passage, of TARP. As I reflect upon Bernanke's statement further, it has become clear, to me, that the future of the both the United States and global economy rests in the hands of credit.
So, what is credit? Credit is the money that a lender (often a bank) makes available to a borrower (you) with the understanding that the borrower (again, you) will repay the money at a future date. A well-known, and frequently acquired, source of credit is a credit card. Compact and easy-to-use, credit cards allow for the borrowing of money to subsidize purchases, which can be essential to everyday survival or for miscellaneous purposes. One is allowed to make these purchases so long as it is done within one’s credit limit, and the money is repaid within 25 - 30 days (monthly). When a repayment is not made within that time period, interest (the percentage of what is owed plus what you borrowed) is added. When exploring the role credit cards have played in the financial lives of Americans, it has been noted that 18 year olds are the heavily sought-after demographic to lure into signing up for one. Moreover, it has also been noted that, on average, the total amount of credit card debt among American is $16,000, which is a composite of borrowers 18 years old and older. Although this figure continues to climb in conjunction with average household debt, should one be excited at the thought of possessing a credit card, such excitement should be supported. However, it is imperative that before any signing on dotted lines occur, learning credit card terms and definitions is carefully done. In my work, I attempt to steer clear of making assumptions regarding my audience and their knowledge of finance. However, I am going to take a risk and confidently state that I am certain that a majority of readers have seen the term Annual Percentage Rate (APR) referenced in overall aspects of finance, ranging from credit cards to loans (auto, housing, and educational). However, when solely examining credit card APR, it is defined as the yearly rate of interest on one’s credit card. To further illustrate how credit card APR is calculated, Discover provides customers with a detailed explanation, “Let’s say you have a balance of $1,000 on your credit card, with an APR of 18 percent. If you hold that balance over a year, the total interest paid annually is $180. You would pay that $180 divided over 12 months, resulting in a monthly interest payment of $15.” Another term to familiarize oneself with throughout the credit card process is fees. Fees are the charges made to your account and include, but are not limited to, annual fees, balance transfer fees, cash advance fees, late payment fees, and over-the-limit fees. From the paragraphs above, it is evident that the research surrounding credit and credit cards is extensive, exhaustive, and yet informative and necessary. Once you have become better acquainted with terms, investigating which credit card is best for your financial needs is next. Moreover, examining the advantages and disadvantages of credit cards is strongly suggested. To start, some of the advantages are that credit assists in making purchases sooner rather than having to save for an unspecified amount of time. Likewise, utilizing credit helps to eliminate the need to carry cash or checks, thus simplifying your life. Furthermore, using credit helps in establishing a “credit history”, which can make it less expensive to use credit in the future. Essentially, those with a good record of using credit (making payments on time) may be able to borrow money at a lower interest rate than those with a poor credit history. Conversely, some of the consequences of mismanaging credit is that it can be costly, resulting in long-lasting and serious damages to your financial life. Because obtaining credit is fairly easy, and making multiple purchases without tracking expenses is common, meeting monthly repayment requirements is difficult. Moreover, borrowing too much money can result in one struggling to make minimum payments. Additionally, while having a great credit history can sometimes lower interest rates, contrarily, having a bad credit history can raise interest rates. It also worth noting that the failure to repay credit card debt can result in late fees, higher interest rates, garnishment of wages, and more. Although crippling, there are laws in place to protect you and your financial life.
0 Comments
Last Wednesday, I decided to conduct a series of polls on Twitter dedicated to debt in the hopes that it would spark an honest and open conversation about its causes and effects. Therefore, to kick off the discussion, I posed the question “Are you in debt due to high interest rates, which are making monthly payments harder to pay off, or is the principal amount too high?” The choices to ponder and ultimately choose were: Interest rates are high; Principal amount is high; I’ll pay my debt someday; I don’t have debt. As I sat back and awaited my audience’s response, I decided to continue the dialogue with a series of follow up questions, which would be compiled into a thread.
The first follow-up question was “For those of you with debt, the largest percentage is due in part to which of the following?” The responses were: Back bill payments; Credit cards; Student loans; Overdraft fees. In a matter of 10 minutes of both questions being posted, the responses were eye-opening. Votes for question one heavily swayed to “interest rates” as votes for question two overwhelmingly swayed to “student loans”. As the votes poured in, I began drafting. The last three poll questions centered on if people felt as if they had a handle on their debt, what options were being explored to eliminate debt, and the estimated years for a final payoff, and the winning responses were: No; Asking for assistance/I don’t need help; 10 - 20 years. While the overall goal of the poll had been successfully achieved, I was plagued with this thought: Although immensely different in how we navigate the world socially, economically we were tied --debt is universal. Based on the poll, it was apparent, yet not surprising, that an enormous majority of individuals had incurred debt. Moreover, the reasons as to why these individuals had amassed large sums of debt were because of high interest rates (as a whole) and interest rates tied to student loans. The large sum of debt attributed to student loans was not shocking because for the first time in United States history, student loan debt has surpassed credit card debt. As a result, the timetable for eliminating debt has increased. When analyzing the responses further, I surmised that individuals did not have a firm grasp on eliminating debt due to one or more contributing factors surrounding employment. These factors include, but are not limited to, part-time employment, unemployment, low wages, and below average income, which as a result has made it increasingly difficult for loans to be repaid on time. Likewise, I further surmised that individuals lacked the necessary access to loan repayment resources, therefore whether they were aware or blissfully unaware of the resources at their disposal, debt would continue to exist and continue to wreak havoc on their lives. Upon final reflection, I can confidently write that last Wednesday’s dialogue was fulfilling as the door for continued education was opened further. Therefore, in an ongoing effort to bolster financial literacy and knowledge, I believe that in order to create an action plan for eliminating debt, learning what interest rates are and how they affect monetary policy (both at the federal and state level) and personal finance is necessary. Often, when boredom strikes and I find that perusing social media sites provides no relief, I comb through my grey Rubbermaid bins to find a film that'll combat boredom. Since my early days of classic Disney films (Aladdin, Beauty and the Beast, Cinderella, Dumbo, Fantasia, The Lion King, and the Little Mermaid) to an evolution that included films from prominent directors such as Federico Fellini, George Lucas, Martin Scorsese, Spike Lee, Steven Spielberg (and countless others), cinema has played a role in my journey to adulthood. Likewise, as I began to explore the various genres of film, as well as began analyzing the content within each genre, I discovered that I was truly passionate about discussing films that spoke to a portion of my core; if you captivated me to the point of boiling anger, catharsis, excitement, and tears, I was prepared to present a thesis as to why you should be seen. While there are a plethora of films that have evoked the emotions mentioned above, I would like to use this moment to present the financial-themed films (both made-for-TV and theatrical) that have not only rocked my core, but influenced how I would participate within the realms of capitalism. Moreover, these films have served as the basis of my financial literacy teaching, and they've been personally played repeatedly to the point of cracking. So, without further delay: Movie #1: Wall Street (1987) From July 1981 to November 1982, the United States suffered through a recession due in part to the Federal Reserve Bank's inconsistency on interest rates, inflation, and monetary policy as a whole. Coupled with the recent announcement of deregulation (the federal government would gradually decrease monitoring the financial behaviors of the big banks), the economy was in a whirlwind. Many Americans were left out of the cold until this film's release. Wall Street not only gave folks an in-depth look at how the stock market was run, but who the players were and how greed (although good and yet one of the Seven Deadly Sins) was only good for those who understood it. Movie #2: Capitalism: A Love Story (2009) In 2008, the unthinkable happened when Fannie Mae and Freddie Mac collapsed. Seriously, they imploded upon themselves, which led to the housing bubble bursting and resulted in tens of millions Americans being displaced out of their homes due to foreclosure and failures to pay back the banks. The housing collapse had a crippling domino effect that led to widespread ruin. As a result, in December 2008, the United Stated declared that they were in a recession. A year later, Michael Moore released this film chronicling the real-world effects the recession had. Movie #3: Inside Job (2010) 2010 marked two years since the recession with no glimmer of hope in sight. As the domestic and global economies struggled to find footing, economists, scholars, politicians, and policymakers offered their analysis regarding the collapse and opinions as to what could have prevented this catastrophic event. Movie #4: Wall Street: Money Never Sleeps (2010) 23 years after the original, groundbreaking release of Wall Street, Michael Douglas returned as Gordon Gekko to settle a score with the industry that had crossed him. Filmed during the midst of the recession, the content centered on both Gordon's resurgence to financial dominance and theatrically cluing the audience in to the damage the recession had done. Movie #5: Too Big To Fail (2011) In 2011, we were still in the throws of the recession, even as the Obama administration worked tirelessly to solve the problems of a faulty stock market, rising unemployment, and overall despair. Throwing their hat into the crisis-themed cinematic ring, HBO released this riveting made-for-TV film with a star-studded cast playing some of the most controversial financial figures to date. Movie #6: The Wolf of Wall Street (2013) The 1980s, Wall Street, New York City, cocaine, diamonds, excess, opulence, the federal government, Margot Robbie, Jonah Hill, Leonardo DiCaprio, and Martin Scorsese. Yeah, it was wild, and it was all true! Jordan Belfort set the bar extremely high with living young, wild, and free and we are thrilled he decided to write the book that would later become this epic film adaptation. Movie #7: The Big Short (2015) Just about every documentary and feature-length film centered on the 2008 financial crisis included analysis, commentary, facts, and insider know-how, which would lead one to assume that the general public was frankly tired of these films. However, that assumption was false as moviegoers continued to pay to find answers. Adam McKay so brilliantly combined comedy and truth to what we have come to know about the recession: Influencers gambled the financial lives of Americans for personal gain, sport, and power. Movie #8: The Wizard of Lies (2017) As we have witnessed, the thread that has tied, and will continue to tie, a majority of financial-themed films is the 2008 Recession, and just when the public thought it could not get any worse, we were introduced to Bernard (Bernie) L. Madoff. Financial mastermind, and manipulator, Bernie Madoff conducted the largest Ponzi scheme in history: swindling individuals and corporations out of $65 Billion. Yes you read that correctly, billions with a 'B'. 8 years after his 2009 sentence of 150 years in prison, HBO brought us The Wizard of Lies starring the incomparable Robert De Niro as Bernie Madoff and the all-around talented force Michelle Pfeiffer as Ruth Madoff. |
WhitneyEducation enthusiast whose mission it is to see Financial Literacy receive well-deserved shine. Archives
September 2020
Categories |