July 29th, 2010
Could The Credit Crunch Be A Good Thing For Us?
They call it the credit crunch because since the recession hit hard in 2007, credit (i.e. credit cards, mortgages, loans) has been locked up so tight it takes a squeaky-clean credit report and 700+ credit score for a lender to even consider you as a potential borrower.
Many articles and blogs grumble about today’s draconian lending practices that make it difficult for average consumers to access a new credit card, auto loan, or buy their first home. To sweeten an impossible deal, interest rates are at their lowest right now, making homes affordable and loan rates attractive. If the economy is supposedly in the slow lane to recovery, why are consumers still locked out of borrowing much-needed credit?
Another spin on it is that maybe this credit crunch is for our own good, protecting us from falling into the same too-generous, too-risky lending practices that caused our economy to take a nosedive into a three-year, recessionary environment. Do picky lenders actually have it right this time?
Good vs. Evil
Today’s post was sparked by two sides of a very interesting debate that was a battle of good versus evil, in the context of credit scores. A New York Times article, entitled “Credit Score Is The Tyrant”, argues that relying on credit scores to determine creditworthy borrowers is flawed, and on top of that, “Treating credit scores as if they were infallible — which is what the banking industry is now doing — is beyond foolish. It is hurting the recovery.” The article mentions that credit scores shouldn’t be so heavily weighted in lending decisions because it is inaccurate; “…the difference between a 620 score and a 619 is utterly meaningless. The credit scoring industry likes to make it sound as if their results are scientific; they’re anything but…The point is that the credit score is derived after an information-gathering process that is anything but rigorous.” The article critiques why credit score models, if they are indeed flawed, prone to mistakes, and not standardized, continue to be a crucial factor–and in some cases the deciding factor–on whether you are deemed creditworthy or not.
In response, MoneyMusings blog wrote, “Credit-Score Whining”, to profess a “whole and undying support for credit tightness” and answer directly to the New York Times bit. MoneyMusings agrees with NYT that credit scores aren’t infallible, but also that, “Credit-reporting agencies aren’t in the business of getting it right. They’re in the business of getting it, getting it compiled, and then getting paid… There’s money at risk here, Joe, you dolt. Lots of it. Lines have to be drawn somewhere.” These stricter lending practices prevent the kind of financial leniency that led to underwater homes and colossal credit card debt that drowned us into recession. If we conceded to softer lending practices that didn’t require an excellent credit score and essentially lowered standards of creditworthiness, “If that’s what you want, well, that record got played from 2003 to 2006. It didn’t finish up so well.”
My Two Cents
So, is the credit crunch a good slap-on-the-hand for consumers, or is it unfair for the many consumers who are indeed creditworthy, but don’t have the credit credentials to show for it?
Regardless if credit practices are unfair or just, too tight or just right, there really isn’t any changing the industry standards. The best thing you can do is work on your credit score. Yes, banks and lenders spearheaded the lenient lending practices that led to recession, and today, many creditworthy people are routinely denied mortgages and credit on the basis of a three-digit score. But calculating consumer creditworthiness without a measurement, such as a credit score, would be impossible in this economy.
So whether you like it or not, credit scores will remain one of the most significant factors in every big finance-related action you’ll take in your life. If you want to own a home one day, buy a car, or open a new credit card, your credit score is your financial ticket. Make it easier on yourself by managing and monitoring it, and learning good credit habits rather than hating on lenders. And maybe one day, you’ll like–maybe even love–your new and healthy credit score.
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Your blog is very much valuable information. thanks for posting.
I think that creditors should consider consumers with some glitches in their credit report be approved for a car loan, credit card or possibly a home loan, because not everybody is perfect. Everybody deserves a fair shot on obtaining what they really want. I have been in this predictament before where nobody wanted to give me a chance to buy a new car. It was always about credit. They said and I quote ” if you dont have good credit, then you cant get financed”. That’s bullcrap. I got financed with a poor credit score with a co-signer and I knew that I was happy about getting financed for a new car. I now know in 1 year’s time, I will once again try to get financed through the Ford Motor Company. A friend of mine works at a local Ford dealer, and he told me and I quote ” if your credit score is not average, which I think its now 650 or better, that even with a co-signer, you will not be approved”. I said wow. That’s crazy, but after credit karma pulled my report from transunion, I know that I am half way there. So thanks credit karma for pulling my credit report from transunion. I feel that being that your website a valuable tool, It breaks down your debt to net ratio, and how well you have been paying your bills on time. Without that valuable tool, consumers would not know how much debt they really have, and what their credit score is all at the same time.
So glad that Credit Karma could help you out! =)