Finance & Investment, Survive the Credit Crunch - Protect your Credit Score


by NORA HANSELL - Date: 2008-09-02 - Word Count: 1032 Share This!

The term 'credit crunch' is used to characterize a period of time marked by a sudden increase in the costs of borrowing and/or a sudden decrease in the availability of credit and loans. A credit crunch can occur as the result of many different causes; a decline in the value of borrowers' collateral, an increased perception of risk in lending or in the banks' solvency, a sudden increase in interest rates, or controls implemented by the central government.

Regardless of the causes, a credit crunch typically leads to a financial crisis of some proportion. It is easy to see how the reduction in the US housing market (assets) has been a prime contributing factor to the current credit crunch in the US. Many economists agree that the 2007 subprime mortgage financial crisis has its roots in inappropriate lending practices, resulting in increased risk for lenders, and inflated confidence that housing prices would remain high or climb higher, leading many borrowers to overextend their debt burden.

The fallout from the subprime mortgage crisis has hit many Americans where it hurts most. Those individuals who took advantage of the subprime market are now being hit with significant increases in the cost of their loans, coupled with a substantial decrease in the value of their assets (homes). Those Americans who believed their assets were secure and their debt burden stable may find themselves in untenable financial straights, unable to keep up with debt payments, yet unable to unload their assets at anything but a significant loss.

In January 2008, statistics showed a rise of 57% in foreclosures compared to January, 2007. In May 2008, the delinquency rate on subprime loans was 25%. The effects are not only being felt by subprime borrowers. Even prime borrowers - those homeowners with solid credit histories - are having problems paying their mortgages. Delinquencies and foreclosures are up in both the subprime and prime borrowing group.

Americans who cannot keep up face an enormous challenge. Often, something has to give, whether it is a payment on a credit card bill or utility bill, or even default on mortgages. As any late payment or default negatively impacts an individual's credit score, the damage this causes is real and can last for many, many years.

It is becoming harder and harder to borrow as banks tighten up their lending practices to address their risk, and more and more difficult for individuals to avoid ending up with higher costs on the credit already obtained and credit to be obtained in the future. Those who accessed interest-only mortgage loans as opposed to conventional loans find themselves having to face much higher interest loans now that they must convert into a conventional mortgage. In many instances, selling the asset isn't the answer, as the value of the asset cannot cover the debt. The result may be mortgage default or even bankruptcy - two of the most destructive details contained on a credit report.

Tips to Protect your Credit Score

1) Manage Debt

Strive to keep up with your current debt repayment plans. Focus on repaying debt quickly and consistently. Make every effort to pay every bill on time, even if doing so means you must cut costs in other ways. Think carefully about how to cut costs. Do you need to spend that dollar or two on take-out coffee each day before work? Consider what you'd save if you brought your own lunch to work instead of eating out. People are often surprised at how these little purchases can add up - often into hundreds of dollars each month.

If cutting costs is not enough, make the effort to contact your creditors. Some creditors would rather renegotiate your payment plan than see you default on repayment altogether.

If managing current debt is problematic, do not take out any more credit.

2) Minimize Applications for Credit

Every time you apply for credit, the lender will perform a credit check. Having too many credit checks can raise a red flag as to your reliability as a borrower and can even give lenders an impression that you're desperate to obtain more credit in any way possible. If you're feeling the credit crunch, always remember that obtaining more credit, especially in the current fiscal climate, is a bad idea.

The primary lesson here is simple. Never use credit to pay off debt.

3) Make Use of Savings

Never underestimate how important it is to protect a good credit rating or to build a stronger credit score. The time and money required to repair bad credit is significant. If you've cut costs as best as you can, yet still cannot keep up with timely debt repayment, use whatever savings you have. Although no one likes to dip into their savings, doing damage to your credit worthiness in the future is usually not worth the price. Use some savings if you must in order to keep up with your debt repayment obligations.

4) Get Professional Help

Every individual's goal should be to get help before they find themselves unable to manage their debt burden. This mitigates the risk of having negative details recorded on their credit history. Talk to a financial advisor and get help to consolidate debt and manage repayments. If you find yourself past this point and have already made late payments or have defaulted on loans, talk to reliable and professional credit repair advisors. It is never too late to turn the corner and the sooner a person deals with their credit problems head on, the better off they will be in the future.

Although the credit crunch continues in the US, many experts see light at the end of the tunnel. Those Americans who are personally suffering from the negative fallout from the current financial crisis are well advised to dig their heels in and make every effort to ride it out. Managing the current storm today may make all the difference in the future, particularly in terms of maintaining a solid credit score. Your future access to affordable credit rests on your ability to repair bad credit scores and maintain good credit histories today.

Submit a free credit evaluation online and learn more about professional credit repair services.


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