How to manage credit in today’s economic landscape
With the Credit CARD Reform Act of 2009 having become effective February 22, approximately 78 percent of American households and an estimated 181 million Americans will experience something new when they review their next credit card statement-a full disclosure of their payoff time. More specific, a notification of:
• How long it will take to pay their card balance in full if making only minimum monthly payments.
• The total amount they will pay, including interest, if they make only minimum payments.
• How much they need to pay each month if they wish to pay off the balance in 36 months.
Intended to establish fair and transparent practices relating to the extension of credit to consumers, the Credit CARD Reform Act is one of a number of regulatory changes aimed at providing consumers with better information so they can make more educated borrowing decisions.
There are many outcomes of today’s suffering economy. Here are two: banks have changed; it’s a tough time to be a consumer.
The truth of the matter is, banks are changing for the better. While most have always acted as trusted advisors to their clients, today’s banks are going to even greater lengths to improve communications and promote financial literacy and a return to the basics of money management-earn, save and invest. In fact, the down economy has aided these efforts. For the first time in more than a decade, the average rate of savings for Americans is increasing, and studies indicate people are being less frivolous with their spending.
So why, then, is credit so difficult to obtain?
Generally speaking, obtaining credit is no more difficult than it has ever been. If a consumer takes their time and does their homework, they will find that banks are willing to lend them money. More important, banks want to lend them money … they are expected to lend them money.
Here are four things every consumer should know prior to applying for a loan or line of credit:
1. What their credit history is. Consumers should obtain a copy of their credit report and check it for accuracy. AnnualCreditReport.com is the official site established by the major credit reporting agencies to help consumers obtain a free credit report once a year. Correcting credit report mistakes can have a big impact on credit score.
2. What documentation is required. Be prepared to document two years of income by having copies of W-2s, pay stubs and tax returns.
3. What the money is needed for and why.
4. What is reasonable. Sometimes, borrowers need to accept harsh realities. For example, home values have declined over the last two years. As a result, the amount of money available as a loan or line of credit against the equity in many homes has diminished.
At the end of the day, consumers need to have a history of making timely payments, demonstrate the ability to repay and not have too much of their income being applied to debt, also known as debt-to-income ratio.
The challenge of our current economic landscape is that so many people are struggling. Unemployment is high, energy costs are rising, property taxes are increasing, etc. As a result, people who have been able to maintain a strong credit rating throughout their lives are now straining to keep up. Many are even falling behind.
Without question, going through a difficult financial period can hurt your ability to secure credit. However, people need to know that even with a troubled history they can still get a loan, and it doesn’t take ten years. It takes a commitment to:
• Make restitution to debt holders.
• Demonstrate the ability to repay.
• Improve debt-to-income ratio.
Again, the ability to secure a loan or line of credit comes down to understanding your financial situation and being realistic with your expectations. As the saying goes, just because you can make a payment on something doesn’t mean you an afford it.
Despite the growing popularity of wealth management programs and personalities who advocate that credit is evil, credit can be a powerful tool to build and protect wealth. For example, credit can help you stay liquid. That is, credit can prevent you from tying too much money up into one item, which will provide you with more access to cash.
Also, sometimes borrowing is the cheaper option. For example, if your company offers a 401(k) with matching contributions, to not fund your account in order to make payment on an item is to lose the added value of the match. So don’t simply discount borrowing, nor should you automatically liquidate a CD or get out of an investment for cash. If you do your homework, plan and calculate that the total interest you will pay by borrowing is less than the rate of return on your investment, then borrow. It is a decision that will help you build and protect your wealth.
The truth is, the fundamentals of banking have not changed. Banking is not about caveat emptor-buyer beware-and betraying the trust of clients. For most banks, it has always been about the opposite-buyer aware-and helping clients achieve their goals. The new regulations help reinforce this value, and this is good for everyone, from bankers to borrowers.
Cheri Doak of Caribou is senior vice president and retail banking leader at Key Bank in Maine. She can be reached at (207) 764-9425 or via e-mail at cheri_doak@keybank.com.
