Tougher Economic Days Ahead for Consumers
The news each day seems to reveal more financial problems for both consumers and corporations. This week included the implosion at Citigroup, the largest bank in the country. Capital One also boosted its forecast for credit losses in 2008 by several hundred million dollars ($4.9 billion to the mid-$5 billion range). The attention has been focused on how these will affect investors, but consumers will also suffer
some consequences from these tough financial times.
"These are difficult days for many households and, unfortunately, they may get worse before they get better," says Bill Hardekopf, CEO of LowCards.com. "Not only are
households having to deal with their own budget and issues in their neighborhood, they are now also affected by global factors that have increased gas prices nearly 20% in the past two weeks, credit industry issues that are making it more difficult to get a low rate for a mortgage or loan, and a growing crisis in corporate banking that will probably increase the rates and fees for credit cards and other
accounts. And the holiday shopping season is about to begin."
The growing credit crisis could now start to have a greater effect on consumers:
* Banks will now limit their risk with consumer loans. They are going to be more selective about who they lend to and be more restrictive in screening applications for credit. That means it is going to be harder for many consumers to get any
type of loan. Their only options may be alternative lenders that charge outrageous rates.
* If you don't have good to excellent credit, it will be more difficult to get a new credit card. "The UK is going through its own credit crunch and stories there indicate that half of all shoppers seeking new credit cards are being turned down. Those who are receiving offers are paying higher rates and fees. I wouldn't be surprised to see that trend increase in the United States," says Hardekopf.
* Credit scores are going to be even more important as lenders keep a closer eye on borrowers. Your creditors areaware of every financial move you make. They judge every
loan, every missed payment, every time you use your credit card, and whether it increases your risk of default. If your credit score drops or your debt utilization ratio increases, they perceive this as increased risk and could increase your
rates.
* Credit cards are going to be a costly but possibly the primary option for financing things you can't afford. Until recently, many Americans used home equity loans to finance things they couldn't afford or to refinance debt. Home equity loans are no longer an option for many, and they are left with much more costly credit card loans to finance their lifestyle.
"Almost half of all families have a credit card balance. If you are to the point where credit cards are getting you through to the next paycheck, you have to make some changes to cut your spending. Running up credit card debt is costly
with interest charges, and your creditors are going to penalize you for it because you are increasing their risk," says Hardekopf.
* Beware of cash advances and other cash offers from credit cards. Even though issuers promote these, using them is just another red flag for creditors that you are strapped and need emergency cash. They are increasing rates and fees for
cash advances to compensate for this risk. Issuers say that cash advances are increasing, which can be correlated with future delinquencies.
"During the last two months in the UK, no less than 125 rates and fees increases have taken place in the credit card industry," says Hardekopf. "Issuers in this country could start to increase rates and fees with greater regularity if
the crisis continues."
The days of easy terms, and easy lending are over. "Consumers must learn how to manage their money to protect themselves. No one is going to be able to finance a
lifestyle with credit cards or other types of loans. At some point, you are going to have to pay for what you buy out of your own pocket. The financial golden rule should be, 'If you can't afford to pay for it today, you will not be able
to pay for it with interest tomorrow."
some consequences from these tough financial times.
"These are difficult days for many households and, unfortunately, they may get worse before they get better," says Bill Hardekopf, CEO of LowCards.com. "Not only are
households having to deal with their own budget and issues in their neighborhood, they are now also affected by global factors that have increased gas prices nearly 20% in the past two weeks, credit industry issues that are making it more difficult to get a low rate for a mortgage or loan, and a growing crisis in corporate banking that will probably increase the rates and fees for credit cards and other
accounts. And the holiday shopping season is about to begin."
The growing credit crisis could now start to have a greater effect on consumers:
* Banks will now limit their risk with consumer loans. They are going to be more selective about who they lend to and be more restrictive in screening applications for credit. That means it is going to be harder for many consumers to get any
type of loan. Their only options may be alternative lenders that charge outrageous rates.
* If you don't have good to excellent credit, it will be more difficult to get a new credit card. "The UK is going through its own credit crunch and stories there indicate that half of all shoppers seeking new credit cards are being turned down. Those who are receiving offers are paying higher rates and fees. I wouldn't be surprised to see that trend increase in the United States," says Hardekopf.
* Credit scores are going to be even more important as lenders keep a closer eye on borrowers. Your creditors areaware of every financial move you make. They judge every
loan, every missed payment, every time you use your credit card, and whether it increases your risk of default. If your credit score drops or your debt utilization ratio increases, they perceive this as increased risk and could increase your
rates.
* Credit cards are going to be a costly but possibly the primary option for financing things you can't afford. Until recently, many Americans used home equity loans to finance things they couldn't afford or to refinance debt. Home equity loans are no longer an option for many, and they are left with much more costly credit card loans to finance their lifestyle.
"Almost half of all families have a credit card balance. If you are to the point where credit cards are getting you through to the next paycheck, you have to make some changes to cut your spending. Running up credit card debt is costly
with interest charges, and your creditors are going to penalize you for it because you are increasing their risk," says Hardekopf.
* Beware of cash advances and other cash offers from credit cards. Even though issuers promote these, using them is just another red flag for creditors that you are strapped and need emergency cash. They are increasing rates and fees for
cash advances to compensate for this risk. Issuers say that cash advances are increasing, which can be correlated with future delinquencies.
"During the last two months in the UK, no less than 125 rates and fees increases have taken place in the credit card industry," says Hardekopf. "Issuers in this country could start to increase rates and fees with greater regularity if
the crisis continues."
The days of easy terms, and easy lending are over. "Consumers must learn how to manage their money to protect themselves. No one is going to be able to finance a
lifestyle with credit cards or other types of loans. At some point, you are going to have to pay for what you buy out of your own pocket. The financial golden rule should be, 'If you can't afford to pay for it today, you will not be able
to pay for it with interest tomorrow."
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