Over the last several months we've seen our economy take a severe beating. It started with the mortgage meltdown and is now seeping its way through Wall Street, the stock market and straight toward the credit card issuers. There are also signs that this trend has trickling down and is beginning to impact aspects of the consumer credit lending environment. These factors alone leave little doubt that we're facing one of the most severe economic environments since the great depression.
While financial analysts and economists continue to debate over the impact that the $700 billion bail out will have on the average American consumer, none of us really knows for sure what will happen over the next 12 to 24 months. What we do know is that lenders have already begun to tighten up their lending requirements and this means continued changes in the consumer credit environment as this crisis evolves. It also means that many Americans are facing a stern wakeup call in regards to the way we currently view and manage our credit.
It doesn't take a financial genius to figure out that the mortgage industry's lending practices were in dire need of a complete facelift. Two years ago, you could pretty much qualify for a mortgage with a minimum FICO score of 580 -- as long as you had a pulse. Not enough consideration was given to whether or not you could actually afford the loan or whether or not you had a high risk of defaulting on the loan itself.
These days 'easy money' is a thing of the past. To give you an idea of how things have changed, in order to get the best deal on a mortgage today you're going to need a score in the 720+ range. And the score alone won't guarantee an approval - you'll also need to meet the new income and collateral requirements. And if you think this is only happening in the mortgage industry, think again.
We're also beginning to see changes in the auto and credit card industries. Take GMAC for example, who recently announced that they would no longer approve loans for consumers that had FICO scores below 700. Other lenders like USAA, have not only increased their score cutoffs on their auto loans, but also on credit card and personal loan approvals. See the pattern? Make no mistake, lenders across the board are becoming more cautious and are beginning to safeguard themselves by looking for borrowers that pose less risk. Less risk means higher credit scores and more lenders are going to place even more emphasis on your credit scores and credit report data.
So how does this impact the rest of us? The current state of our economy has many of us worrying about what tomorrow may bring. This means that a lot of us will need to take a step back, re-evaluate the way we manage our finances and our credit obligations, and start living within our means instead of beyond them. There are two important lessons that we can learn from this debacle:
- Credit isn't a right - it's a privilege. How we manage our credit reports and credit scores are a direct reflection of our credit risk. For high scorers (750-780+), the credit crunch probably won't impact your ability to obtain credit when you need it. But for those that have poor credit and credit scores, it's going to be even more important than ever.
- It's time to start living within our means. That's right, it's time to take a step back and reevaluate our relationship with money and realize that if you can't afford something, then you shouldn't be buying it. This means reevaluating how and why we use credit cards. Is it to live an unrealistic lifestyle? If so, time to make the change.
The current financial crisis is a wake up call for all of us. And while many blame the current crisis on the sub-prime mortgage industry giving loans to consumers that shouldn't have been approved in the first place, (which may be true) -- we can't ignore the fact that consumers that got themselves into these loans should at least share a part of the responsibility. At some point, we all need to accept responsibility and be accountable for our own actions.
No comments:
Post a Comment