Maintaining Good Credit has Become a High Stakes Game

Balancing Financial Precision: Navigating the Percent Sign with Grace

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Credit Sesame on the reasons for maintaining good credit in today’s economy.

The stakes for maintaining good credit are higher than ever. In October 2022, recent news provides multiple examples of how important good credit is in today’s economy, and how consumers’ credit is under attack.

Concerned Lenders are Tightening Credit Standards

According to the Mortgage Bankers Association, lending standards on mortgages have tightened for seven straight months. This makes mortgage approval harder to obtain than at any time since March 2013.

Lenders tighten approval standards when they are concerned about economic conditions. Rising consumer debt levels raise the possibility that more households are overextended. The threat of a recession further heightens the risk that more households may start to default on their loans.

With high inflation, people have been leaning more and more on credit. However, tightening lending standards mean it’s tougher to get credit unless you have a strong credit history.

Interest rates continue to soar

Credit is harder to get these days and comes at a high price.

According to mortgage finance company Freddie Mac, 30-year fixed mortgage rates more than doubled this year. The Federal Reserve’s Consumer Credit report shows that the average rate charged on credit card balances rose by over 2% since the first quarter. Personal and auto loan rates are up, too.

With inflation still raging and more Fed rate increases expected, the cost of credit may increase further. This creates a tough choice for consumers: they may feel the need to borrow more to make up for inflation, but that borrowing just adds to their rising expenses.

Maintaining good credit helps address these problems

Building and maintaining good credit can help consumers deal with both tighter credit standards and rising interest rates.

When lenders become more cautious because of economic concerns, they cut back on higher-risk loans and concentrate on lower-risk ones. Applicants with good credit are more likely to apply for a loan successfully.

Good credit also helps counter rising interest rates. Most lenders and credit card companies offer different rates depending on the risk profile of the customer. Customers who present a higher risk to the lender receive higher interest rate offers.

Credit card rates can vary by about 10% depending on your credit score. Mortgage rates can vary by a point or two – which can add up to tens of thousands of dollars worth of interest over the term of a 30-year mortgage.

A good credit score means you are more likely to be offered lower rates. If you improve your credit score, you might even see your credit card rate drop.

Consumers face multiple assaults on their credit

Although good credit can help you overcome tighter lending standards and higher interest rates, the problem of maintaining good credit remains. In the current economic environment, credit scores are under attack from multiple directions.

Inflation is driving borrowing higher

Prices have risen so fast that many consumers find themselves caught short. Suddenly, a paycheck doesn’t cover expenses as it used to.

It’s natural to turn to credit to fill the gap. This has created a growing debt problem.

Federal Reserve figures show non-mortgage consumer debt is up by 12.9% over the past two years. A sudden rise in borrowing can hurt credit scores in two ways:

  • First, as people add to their debt balances, their monthly payments rise. As those payments get higher, more households start to miss some of those payments. Payment history is the biggest factor in credit scores, so missed payments are very damaging to credit.
  • Second, higher credit balances mean people are often using a larger portion of their credit limits. Credit utilization, which is the percentage of your available credit that you use, is also a factor in credit score. More borrowing pushes credit utilization up, which is likely to drag credit scores down.

This can become a destructive cycle. As people rely more and more on credit, that reliance damages their credit scores.

A recession could tip millions of households over the edge

The threat of a recession has loomed over the economy for several months. If that threat becomes a reality, it could become a credit crisis for people who live on the edge financially.

Recessions over the past 50 years have triggered an average increase of 4.1% in the unemployment rate. Projected onto today’s labor force, that would translate to a loss of nearly 6.7 million jobs.

Americans have various resources to see them through a period of unemployment, such as savings, unemployment benefits and other household income. However, for households that rely on borrowing to make ends meet, there is little margin of safety. Even a partial decline in income could make it impossible to pay the bills.

Fraud makes maintaining good credit difficult for victims

It’s challenging enough that consumers have to worry about how their own financial behavior affects their credit. What makes it even tougher is that criminal activity also threatens that credit.

Credit card details from over a million consumers were recently released on the dark web – an internet for predominantly illegal activity.

This is the latest example of how technology is used to blow up the scale of financial fraud. This increases the necessity for vigilance. If consumers’ financial information is stolen and used fraudulently, it can damage victims’ credit and lose them money.

The solution is to take great care of your financial logins and assume the worst. Any text, email or call receive could be from someone trying to steal information. Be watchful and catch any fraudulent activity before too much damage is done. Consumers should review each transaction on their credit card and bank statements. They should watch for abrupt changes in their credit scores and check their credit reports regularly. Signing up for credit monitoring can help you keep your credit under continual surveillance.

Credit is a vital survival tool in today’s economy. Unfortunately, credit is also under multiple threats. That means customers need to take steps to defend their credit.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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