|
Consumer Borrowing in 2009 Will Mean Making
a Plan
If you're planning to buy a home or a car in 2009, the
process is going to be a lot tougher without an excellent credit
score and a significant down payment. So that means you're going
to have to work harder — and possibly wait a little longer —
to make
those key purchases.
What's a good credit score? According to credit scoring giant
Fair Isaac Corp., the best FICO score range as of late 2008
stood at 760-850; that minimum is roughly
20 points higher than it would have been a year ago.
Barring any major federal action to loosen up these markets
on the consumer level, these factors make it particularly
important to make sure there are no skeletons in your credit
closet.
The Federal Reserve Board's statistics show that outstanding
consumer credit has increased from a bit more than $2 trillion
in 2003 to $2.5 trillion by the end of the second quarter of
2008, representing a 25 percent increase over five years. These
high levels of debt, combined with a global credit crunch, have
tightened up lending to all but the best customers — and they're
having trouble too.
If you have extraordinarily high debt levels, a record of
late payments or very little money to put down on that home or
car, you need to do some advance planning before you contact any
lenders. Here are issues you need to incorporate into your
planning:
Get some advice. You might be focused on paying down
debt or saving up your down payment, but credit is only one part
of your lifetime financial picture. It might be a good idea to
talk with a tax professional or a financial planner to learn how
to best use credit. It's always good to determine what your
limits should be.
Pay down the balances you have. Next year, Fair Isaac
Corp., the company that created the FICO score, will be
adjusting the way it computes its credit scores. One of the top
changes will be a greater negative weight on credit utilization —
how close you get to the borrowing limit of each of
your accounts. The company says that for optimal scoring, each
account's outstanding credit should be no more than 50 percent
of the credit line and hopefully less. As you're paying down
your balances, it's wise to focus on the highest-rate credit
cards or loans first.
Set a credit report review schedule. You have the
right to get all three of your credit reports — from Experian,
TransUnion and Equifax — once a year for free. You can do so by
ordering them at www.annualcreditreport.com.
Don't order all three of them at the same time, though. By
spreading out the dates you receive each of your credit reports,
you'll get a continuous view of how your credit picture looks
because the three bureaus feed each other the latest
information. It's a good way to clean up errors and keep a
steady watch for identity theft. By the way, all those ads that
advertise free credit reports? Most of them will demand a credit
card number from you, which means at some point those reports
won't be free. The aforementioned web site is the best place to
get reports that are truly free of charge.
Pay on time and pay more than the minimum. If you've
been late with payments or have stuck only to paying the
minimums, it's time to give that up now. Here's what you do. To
avoid late payments, note the due dates when the bills arrive
and then set a date for payment five to seven days ahead so
you'll definitely be able to mail your payment on time. To put
more toward the balance, finally do a budget — this will help you
identify the non-essential spending you've been doing so you can
pay your outstanding credit balances faster.
Cut up cards, but don't close the account. Closing
accounts — even those that have had zero balances for years —
is a
bad idea. Lenders want to see a long record of responsible
credit management, and longtime accounts that you haven't
touched in years may actually help your score because it shows
you have some restraint.
No-doc or low-doc loans? Find another way. If you are
self-employed or otherwise don't have a lot of verifiable
income, you may have the most trouble getting a loan. While
banks and other lenders two years ago might have bent over
backwards to lend to people with unverifiable income, that gravy
train is mostly over now. If you do get a loan, you'll pay far
more for it than you would have before the credit markets blew
up.
January 2009 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
|
