Taking on new debt in an economic downturn
Credit card issuers are pinched; in turn, they'll be pinching you
By Todd Ossenfort | Published: October 6, 2008
The Credit Guy
Dear Credit Guy,
You address many money matters and lately there has, of course, been much talk of potential seizing of the credit market. With this in mind, could you kindly advise as to your opinion of whether or not today it is more difficult for businesses or individuals to get new credit cards or balance transfers? If the bailout proposal moves forward, do you think it will be easier to get new credit then? When applying for credit, inquiries are made and there is a certain impact on FICO scores. What would you recommend to someone (individual or business) about making application for new credit cards? Do it right now or sit back and wait until they work out this plan? Your expert opinion would be greatly appreciated. Thank you in advance. -- Diane
My question for you would be, "Do you really want to take on additional credit liability in this volatile, and uncertain economic cycle?" How you have managed your borrowing and payment history prior to the economic downturn will far outweigh any ability to obtain new credit in this current cycle. Remember this is just that, a cycle. Things will get better. They always do. We just don't know how long it will take for our resilient economy to come roaring back stronger than ever.
The short answer to your question is, yes, I believe it is more difficult now than it was six months to a year ago to qualify for new credit in the form of a credit card. It is also way more difficult to obtain a home mortgage or a home equity loan. The days of a 0 percent down payment and a low FICO score qualifying for a home mortgage are gone. That ship has left the dock. The credit cycle has been tightening for quite some time and the recent activity on Wall Street and the pending bailout has increased it to close to the complete seizing that you mention in your letter.
If you really feel you need access to additional credit with a credit card, I would wait until the "bailout" or economic rescue package has been finalized and the dust settles somewhat before applying.
My recommendation is to review your finances carefully and ensure that you are protected as much as possible from any negative consequences of this current credit cycle. Below are some things to consider:
- Credit card agreements can be changed by the card issuer for many different reasons. Be aware that many issuers may decide to lower credit limits in an effort to minimize their exposure. What this means for a cardholder is that you will have less access to available credit and your credit score may decrease due to an increase in your credit used versus credit available ratio.
- A possible decrease in available credit means you are more vulnerable if you rely on credit for emergencies. If you have not started an emergency savings account, now would be a great time to start. The goal is to have three to six months of living expenses available for unexpected expenses.
- If you are using credit to extend your income, stop immediately. Your credit supply may soon run dry and adding to a debt load right now could be disastrous. Create a spending plan and bring your expenses in line with your income. If you need help doing so, contact a reputable credit counseling agency that can review your finances and assist you with creating a workable spending plan.
Diane, my advice to you would be to tighten your belt and weather the storm. I hope you will refrain from obtaining any new credit cards for the time being.
Take care of your credit!
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