If it’s high, Now is a Good Time to Borrow

In this crazy lending market, interest rates have remained at historic lows but all the banks have gotten so picky that most requests for loans go unanswered.  There is an old saying that goes, “If you don’t need the money, you can borrow all you want”.

Well, a year after the global freeze in the credit markets that caused massive government intervention (aka interference) interest rates continue to remain at historic lows.

That’s great for people with good credit.  If not, it seems like you could be wasting your time.  Credit has gotten to be so tight that if you are willing to be interrogated for several days, and can document your entire life story, (video and pictures help) along with signed letters from every institution that you have done business with, you might be considered for a loan.  And from all we can see, it’s going to be around for a while.

Bank and financial institutions are on the defensive posturing stage.  After many completely blew lending on the mortgage side, it has had a ripple effect in all other areas of lending from home purchase, to auto, to personal loans, and any other mode of credit issuance that was common in the past.  Not now.  No segment of borrowers has been spared. During the housing boom five years ago, 7 of 10 applications were approved.  Today is 5 in 10.  With credit card companies getting tighter with credit, consumer credit carddebt declined by $6.1 billion in July.

For perspective, big banks are not risk averse.  That’s common sense, right?  Rather, their reluctance to lend has to reflect the fact that they must conserve cash to absorb billions in losses that are still expected to occur from bad loans that were made before our financial meltdown last September of 08. FDIC-insured banks lost a total of $3.7 billion in the second quarter, dragged down by growing number of bad loans.  They set aside nearly $67 billion in the second quarter in anticipation of future losses from all those wonderful decisions that they made for years leading up to the crash.

Oh, there are a lot of other reasons, such as the lack of ability to pool loans into securities, (ABS = auto back securities) for sale to investors, or securitization. Lehman brothers collapse pretty much dried up this market outlet but there are signs of opportunity that crop up from time to time.  With consumers ratcheting back their borrowing and banks getting tougher with their lending criteria, rates will remain low for those who have good credit.  If you can stand the pain, you will benefit from the gain.

What has been your experience?  We would love to hear what you are seeing from your point of view.

Here’s to getting this economy back on track.

Here are some basic tips:

Pay on Time. Every time!
Your track record paying all your bills, not just your credit card, is the single biggest factor in your credit score. It accounts for 35 percent of your score.  Even if you only send in the minimum amount due on your credit card bill, send it in on time. No Excuses If you find that you are late every month on one or more bills then you are living beyond your means. You need to cut back on something or work something out with your creditor to move your due date. Communicate with your creditors and let them know what is going on.

Don’t Max out your credit cards
The amount you owe on your credit cards as a percentage of your outstanding credit limit—known as your debt to credit limit ratio—accounts for 30 percent of your score. The best way to keep this percentage low is to make sure you don’t run up a big balance. Another option is to call your card company and ask for your credit limit to be raised. For example, if you have a $5,000 balance and a $10,000 limit, you are at the 50 percent level. But if your credit limit is raised to $15,000, your ratio is reduced to 33 percent. Just be sure not to use the extra credit limit for “emergencies.” I can’t tell you how many times we said buying and outfit for a wedding was an emergency. Keep things in perspective.

Build a Strong History.
How long you have had an account determines 15 percent of your score. The longer the history, the more confident a lender can be about your financial behavior. For this reason, don’t cancel any unused cards, because their history will be wiped from your record. So, let’s say you no longer use a card you took out 10 years ago, because you got a better deal elsewhere. That’s fine; just stick the card somewhere safe and sound, but don’t cancel it outright. Even though you aren’t using the card, you still want to use the history. The longest account I have is a gas card from 1991. If I would have cancelled it my next oldest account is from 1994. Makes a difference.

Don’t Be a Credit–holic.
Potential lenders hate to see you applying for a lot of credit; it makes them think you’re going to get in way over your head with debt. Your pattern of opening new accounts, or applying for new accounts, determines 10 percent of your grade. One important caveat: If you confine your mortgage shopping to a two-week period, all those applications (and lender requests for your credit score) will be bundled together and count as only one request on your record. Same goes for auto buying. If you apply for auto credit in the same 14 day (2 week) window it all counts as one request on your record. Try to limit your requests for credit to once a year. Don’t apply for those in store credit cards just for the sale. 10% a balance that charges 22% is not that great of a deal.

Watch Your Mix.
You don’t want to have a ton of open credit lines or loans. Your mix of credit cards, retail cards and installment loans accounts for the final 10 percent of your score.

I recommend going to myfico.com and purchasing all three credit bureaus for review. After you buy the Suze Orman’s FICO® Kit Platinum you can get on the road to improving and maintaining your credit. You can’t improve if you don’t know where you are now. Find out now and keep moving forward instead of backward.