Credit Trends – THIS IS IMPORTANT
Current Credit Trends and How They Affect You
- Today, U.S. businesses buy 10 billion FICO scores annually. To put this number in perspective, there are 115 million households in the United States according to the 2010 Census. That means that creditors buy almost 100 credit scores per household per year. With the advent of technology and the ability for businesses to obtain information in “real-time”, credit scoring and its’ close cousin, behavioral scoring, have come of age. Today, credit grantors are constantly evaluating every payment you make to every creditor to determine your credit worthiness as well as your current “risk” to their portfolio. For example, let’s say you have two credit cards, you pay one before the due date and one you pay slightly after the due date. In the past, your creditor only looked at your payment history with their organization but, today, many creditors can reduce credit lines almost immediately if they see any change in payment behavior.
- This is the reason why you should read your credit card agreement. It is generally available online or you can request one from your credit card companies. Generally, creditors can and will increase your interest rates even if you have not been delinquent with them but have been delinquent with another creditor. In essence, your agreement with your credit grantor today is not set in stone. It is a constantly changing landscape based on your payment patterns.
- If you are between the ages of twenty-one (21) and forty-five (45), you have never really lived in a time when your credit report was so important to your successful financial future. If your credit was less than stellar, you could still get credit at higher interest rates. Today, getting credit and keeping it is based on your payment history with all of your creditors. Also, things like home equity loans are going to be more difficult to obtain because banks now require higher LTV (Loan to Value) ratios and most homeowners do not have sufficient equity in their homes to refinance or obtain a new home equity loan. Banks also have higher capital reserve requirements as a result of new banking regulations. Higher reserves mean less lending and that means tighter restrictions. If you think about it, most sensible people will agree that we will not see a return to the “easy credit” of the past anytime soon. Millions of Americans will have to change their payment and spending habits and budget for purchases that could easily be financed in the past.
History of Credit in the United States In the 19th century, it was thought that only irresponsible families bought on credit. The origins of today’s credit culture dates to the 1920s and the advent of installment lending for cars and appliances (stoves, refrigerators, radios), says economist Martha Olney, author of “Buy Now, Pay Later”. “Attitudes changed”, she says. “By the 1920s, it was only foolish families that didn’t buy on credit and use it while they were paying for it”. In the mid-1920s, 60 to 70 percent of cars were sold on one- to two-year loans. That rise in credit contributed to the difficulty for many families during The Great Depression. After World War II attitudes changed again and credit became part of the mass market. In 1958 Bank of America introduced a credit card that in 1976 was renamed Visa. The combination of aggressive merchandising and government laws encouraging home ownership and credit expansion enabled most Americans to buy homes and qualify for multiple credit cards. As a result of increased home ownership and the elimination of credit card interest as a deduction on personal income taxes in 1986, home equity loans grew at an exponential rate. The “buy-now, pay-later” social shift enabled our economy to soar but it also increased debt to unsustainable levels unless housing prices continued to expand over time (another change in attitude). This led to a huge expansion of borrowers. One reaction to the credit expansion was the use of impersonalized, computer-driven credit scores to determine loan eligibility (FICO SCORES).
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