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Your Credit Score and Borrowing Money

For the first entry in Friday’s Financial Fitness series, we thought it would be appropriate to discuss how your credit score impacts your borrowing opportunities.  You hear everyone talking about the importance of raising your credit score to “improve your credit.”  But what does this improved credit bring?  Which specific advantages will you have by doing so?  Bottom line: why should you be motivated to raise your credit score?  Let’s take an in depth look at an important advantage you will have-why raising your credit score increases the amount of opportunities you will have to borrow in the future.

First, it is important to review what your credit score represents.  Your credit score is basically a snapshot that assesses your financial stability.  It tells a story of how much outstanding debt you have, how much debt you have already paid off, as well as the likelihood that you will pay your bills on time in the future.  Ranging from 300 to 800, the higher your credit score, the better.

Raising your credit score puts you in healthier financial standing, which in turn makes it easier to borrow.  How does this work?  Let’s say you are looking to buy a house.  You have a plan-you have been looking at houses and you’re ready to take the plunge.  After assessing the amount of money you have in the bank to pay your down payment and your future mortgage, you realize that in order to make your dream of owning a house a reality, you need a loan.  When you meet with a potential lender, they will be basing their decision about whether or not to grant you a loan on the amount of risk you present.  Banks need to have a certain level of confidence that you are going to be able to pay back this loan over time, which comes in the form of your monthly mortgage payment.

So where can they look to determine the risk they’re taking?  Banks go straight to your credit report.  They want to see how much debt you have and how on-time you are with other payments.  Since they may know nothing about you prior to your loan appointment, this is a sure-fire way for them to assess your financial situation.  With good credit, you will increase your chances of getting that loan approved in the first place.  Also, once your loan is approved, having good credit will lower the interest rate the bank charges you each month.  Over the life of a 15 to 30 year mortgage, a lower interest rate can save you thousands and thousands of dollars!  If you have what the bank considers bad credit, they may not approve the loan in the first place, as they may feel that your payment history is not reliable.  If they do approve your loan, despite your bad credit, your interest rate will certainly be higher.  Furthermore, the initial down payment on your dream house will be higher because of your low credit score.

So the next time you hear someone mention the importance of raising your credit score, know that doing so will not only give you peace of mind; it will also increase the amount of opportunities you have to borrow money in the future-at a lower interest rate!

Credit Card Rate Changes – What Can I Do?

It may have happened to you or to a close friend. Unexpectedly, for no apparent reason, the terms and payments on your credit cards has dramatically changed!  You always paid your bills on time-you always paid more than the minimum payment and were a long time customer.  Suddenly you go to the mailbox and find that your credit line has been cut in half, even as your interest rate doubles or triples!  Recent surveys are saying this could be happening to as much as 30% of Americans with credit cards!

So what are your options if the credit card companies do this to you?

  • Call the credit card company directly to see what options you have.  If you have a solid payment history with this creditor, voice your disagreement regarding the reduced limit or rate change.  Argue that you have always made your payments on time, emphasizing that you are a long-term customer
  • If you are in good credit standing, you could have the luxury to shop around for a card with an even better interest rate.  You have the ability to take advantage of the fact that banks are lending again.  Balance transfer credit cards can provide time periods with low or 0% interest rates.
  • People are either hesitant to borrow or have too bad of a credit situation to qualify for a new card.  If you are unsure of where your credit stands, sign up for free credit monitoring.  There are a few websites that compare credit cards based on credit score requirements.  You can use the Federal Reserve website for more information about what to look for when credit card shopping.
  • Do not close your current credit card accounts.  Doing so can actually affect your credit score negatively, limiting your ability to borrow if your situation gets worse.  You also have no idea if the cards you keep will one day change their terms and limits.

So how do you know if your credit card company will spontaneously change your terms and payments?  Honestly, you don’t.  While there is a law that governs consumers’ rights with credit cards, unfortunately, most of us sign a contract with the lender that gives them the right to make these changes to our credit lines and credit cards.  Continue to monitor your monthly statements and online accounts to see if changes are coming.  Aside from rate and term changes, pay attention to news of your bank being acquired by another.

We should take action to lessen our dependency on credit cards.  We need to learn to live within our limits and buy only what we can afford.  Altered payments and interest rates is the first sign that times are changing; as a result, our old spending habits have to change.

Peer to Peer lending – Where Did it Go?

Peer to peer lending is now all but gone; however, for a while, peer to peer lending was the last resort for many in getting a loan.  Since banks began reducing the number of loans and stopped taking new applicants, peer to peer lending communities were often times the last place to go.  One of these communities, Prosper.com, has changed the language on their application page.  It now reads “We are unable to fund your loan at this time. However, Prosper has agreements with trusted partners who will work with you to determine if you can get a loan. If you would like to proceed please fill in the application below.”

So what happened to peer to peer lending?  Well, the government basically came in and said individual people cannot judge whether or not to lend other people money.  I find this both upsetting and amusing.  I was involved in one of these peer to peer lending communities, both as a lender and as a borrower.  I thought I was a great judge of who to lend money to! If I had an issue or concern, I could always ask the borrower.  I used a loan that I received from a peer to peer lending community shortly after college to consolidate my debts into a lower rate.  I am a big fan of the entire experience-from setting up my profile and loan request, to navigating the bidding process-all the way to funding.  I received a fixed rate loan, unlike the credit cards, that I planned to pay it off in three years time, unlike the credit cards.

The more and more I look around the web, the less and less places I find that enable consumers to go and get loans.  Credit cards are disappearing left and right.  Straight up unsecured personal loans are all but gone. Peer to peer lending was the last stop for most people, and now that is gone.  With regulators finally getting involved, I guess it was inevitable.

Banks say they are lending again-it’s just that most people are scared to apply.  I have actually heard otherwise from the lending community.  Banks are just forced to be picker with the criteria of their borrowers.  It looks like pay day loans and their dangerous pitfalls are all that is left for most American borrowers who are desperate for money.

What can you do if you are in these tough situations?  Before making any move you should always know where your credit stands.  You can always sign up for a free online credit report if money is tight.  If you find out your credit is in bad condition you are going to have trouble trying to get a loan.  Debt management help may be your last resort.  Be sure to compare the companies and programs that are out there as some specialize in debt settlement, credit counseling, and bankruptcy.

So Long to Declare a Recession

Why did it take so long to declare that America is in a recession?  If a recession is defined as two consecutive quarters of negative growth, then why did the government finally declare that we have been in a recession for 12 months?  I mean come on—did they think the public was that stupid?  You and  I knew it.  We knew it every time we went out to eat, every time we filled up our gas tank, every time we looked at out bank statements, and every time we heard about another close friend getting laid off.  Why did it take  the National Bureau of Economic Research so long to “officially” confirm it? My guess is they didn’t see it when more and more mortgages were going into default.  I guess they didn’t see if after more and more homes were going into foreclosure.  Did they see it   when the government set up $700 billion to bail out the banks?  Well actually we did hear about the recession in early December, so maybe the bailout triggered in the light bulb?