Your credit score is about to get a boost in value, at least as long as it is reasonably good. Because of the current economic crisis, many lenders are tightening their lending requirements, and having a higher credit score will make it easier for you to get a loan in this environment.
Why are loans becoming more difficult and expensive to obtain? Cash flow. One of the current problems facing our economy is that many financial institutions bet heavily on mortgage backed assets which have lost a lot of value. This means many banks have less money coming in, which decreases their cash reserves and their ability to create new loans.
What does this mean for the average business or consumer? Fewer and more expensive loans. Banks are required to keep a certain amount of cash reserves on hand. When their reserves run low, they are less willing to hand out money, and when they do, they want a better likelihood of payoff. That means banks are going to be less likely to make loans to those with lower scores and more likely to lend to people with higher credit scores. Banks may also charge more for loans in the mean time.
Your credit score is a valuable asset
Your credit score is valuable for many reasons, primarily because it allows you to more easily obtain credit and at lower interest rates. But a high credit score can also help your qualify for a cell phone, avoid paying a deposit when you get utilities for your home or apartment, and get lower insurance premiums. Your credit score can also be used by potential employers and landlords as a screening tool. Your credit score is valuable, and you should treat it like an asset and work to improve your score.
How your credit score is determined
Your FICO credit score is determined by several factors, each of which are weighted according to a formula set by FICO, and posted at the myFICO website.
This chart breaks down the components of your FICO score.
How you can improve your credit score
The best place to start to improve your credit score is to become current and stay current on every billing cycle. As you can see from the chart above, your credit score is comprised of several variables. Once you are current, you want to work on the areas that count the most. Being current on your payments improves your payment history, which makes up 35% of your score. After that, you want to pay down your loans which reduces the amounts owed (30% of your score).
Canceling credit cards can negatively affect your credit score if you aren’t careful. Canceling credit cards can reduce the length of your credit history (15% of your score) and increase your credit utilization (the amount of money you owe compared to the amount of available credit).
Applying for new credit cards or loans can reduce your score as can the type of credit you utilize. Some forms of credit are considered better than others. For example, a car loan or a mortgage is better perceived than a store credit card or a payday loan.
How long will the restricted lending practices last?
With the current credit market currently unstable, no one really knows. Right now a lot of it depends on the bailout bill and whether or not it gets passed. The goal of the bailout bill is to give banks more money to make more loans.
Right now the best thing consumers can do is to work to improve their credit score. you never know when you will need it, and it’s always a good thing to have!