Posts Tagged ‘credit scores’

The United States Credit Crisis

As you’re probably well aware, we have a problem in the United States; it’s the financial system. Our economy and the systemic problems we are facing now threaten the security and stability of the dollar now more than ever before. This can be proven not only through the media and the actual details of the damage itself that has been done by our risky decision-making, but by the continual rise in the price of gold as investors retreat from securities to find a safe-haven. Bail-outs of major banks and reckless spending by our government have caused a national deficit larger than any ever recorded in the history of our country. Inflation is hitting us where it hurts the most, our wallets. When this is coupled with higher gas prices mostly from oil production being decreased due to global turmoil and natural disasters here
domestically, one must wonder if a collapse could take place.

It all began with greed. People with insufficient credit scores (the inability to pay their bills), which directly translates to lower income persons and poor judgment in financing decisions, to purchase homes wanted to live beyond their means. Major retail banks and mortgage lenders saw this opportunity to charge higher interest rates and profit further. They never saw what was coming.

The United States credit crisis was primarily caused by the offering of so-called “safe” investments by banks and mortgage companies and lenders. These types of loans were called sub-prime mortgages. When a borrower would not qualify for a traditional 30 or 15 year Fixed (Fannie Mae or Freddie Mac Agency) loan, the borrower was typically referred to a sub-prime mortgage lender. Sub-prime mortgage lending would provide you with a two or three-year ARM (adjustable rate mortgage – meaning not fixed). The starting rate would be anywhere from 8-11% (yes, that’s right) and would be fixed only for the two or three year term. For ever year after that term that you kept the loan, your interest rate would increase two percentage points. So, you could end up with a 17% interest rate in year five.

As if what I just said wasn’t bad enough, these loans were being handed out to people who couldn’t pay their bills in the first place and typically had pre-payment penalties of astronomical amounts, so you would have to pay that and closing costs to refinance to even keep your home without selling it. What would happen when someone defaulted? The bank would foreclose the loan and sell the house for what they could get to recoup their losses. Since appraisal values are based on what your neighbor’s house sold for, your house dropped in value, leaving no room for you to refinance out of YOUR sub-prime loan, so you would foreclose, causing a domino effect.

Lenders started losing money left and right, and Wall Street caught wind of this, so they pushed the halt button on purchasing these loans which they had previously been packaging up from the lenders and selling them as mortgage-backed investments at home and over-seas. The sub-prime lenders went out of business, along with everyone who had invested in sub-prime mortgage lending. Major banks required government bail-outs to stay afloat and the time-bomb that we had created was felt overseas because foreign economies had made these investments alongside us. The financial system requiring the government to hold it together has caused a behemoth national debt that could ruin the dollar in the end.

Today, we see banks reducing the amount of money they can extend to people starting small businesses or wanting to finance, which has earned the label “The Credit Crisis.”

W. Paul Stogner

What is a Good Credit Score?

The majority of the general public doesn’t understand how their credit score is calculated, much less what a good credit score is. Generally speaking, one has to establish a record of timely payments and available credit to increase their score. Higher credit scores will enable you to finance more expensive items such as homes, cars and qualify for most credit cards.

Credit scores range from 350-850. It is rare to see credit scores above 800, just as it is rare to see credit scores below 500. This should provide insight as to how broad this scale is.

Most people with a credit score of 700 or higher will be able to finance whatever they wish (assuming there are no outstanding collections, judgments/garnishments, bankruptcies, etc.). When applying for a mortgage, this score also assumes that the individual has everything else in order, such as: income, cash assets or seasoned cash reserves in the bank (typically a two-month average balance), a limited amount of liabilities (or low debt-to-income ratio), and employment for two years or more in the same industry for the purpose of proving a solid or sustainable income.  When applying for a car loan sometimes requirements are less strict.

It takes time to be able to achieve a credit score at the 700 level or above. Typically, to obtain credit, you must be 18 years of age. At this point in life one has not established any credit. To establish credit, it helps to maintain a good record of payment with utilities companies and obtain a credit card or two. A friend of mine recommended that credit score could be increased by obtaining three credit cards, charging $100 to each of them and paying them off using the minimum payment every month for 12 months or so. This exact strategy, however, explains the general principle of how credit is established.

Credit takes time to build and to repair. Most people starting to build credit in their late teens won’t see a 700 credit score until they’re 25. Repairing credit is much harder with regard to increasing score because many times the damage has been done. The hassle of paying off collections/judgments and then getting the paperwork to the credit bureaus and then, on top of that, having to wait for them to update the report can be difficult to tolerate. Some people opt for credit repair agencies to help them. While this can be a convenience in a difficult situation, it can counter-act an increase in your score if the bureaus catch wind of it.

A reduced credit score can drastically affect your ability to obtain a loan in the event you would need one.  If the score range is say 620-680, you’re likely going to get a much higher interest rate than if you had a score of 700+.

W. Paul Stogner