Commentary: Even the Best Borrowers Will Feel the Brunt of the Credit Crisis
Some bad news headlines hit home more than others.
Gas prices and inflation, for example, are tough to avoid. Falling real estate prices may not be an immediate concern -- assuming you are not trying to sell your property into a sinking market -- but they clearly have an impact on net worth.
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The credit crunch is the one area that many consumers think they can sidestep if their financial situation is not perilous. After all, the term "credit crunch" was just put into the Concise Oxford English Dictionary, defined as "a severe shortage of money or credit," so anyone with decent credit or stable cash flow is likely to believe that credit headlines represent someone else's problems.
Unfortunately, the same pervasive situation that made "credit crunch" a household term has also made it a household problem, in ways that many consumers don't immediately see.
Understanding how the credit crunch affects you may help minimize its negative impact. That's why it's time to look at five key ways the credit crisis has changed the landscape for all consumers, and not just those feeling the financial strain of the sour economy.
1. Wider Spreads
Credit spreads are wider -- especially on mortgages -- and likely to stay that way. That means higher interest rates and fewer chances to refinance debt.
Credit spreads -- the difference between what the consumer is charged and a benchmark interest rate -- got very narrow when interest rates were at record-low levels. When rates started rising and delinquencies began mounting, lenders started re-evaluating the real risks of where they were spreading their money. As a result, they're not so quick to cut a deal.
Consider that the benchmark 10-year Treasury yield currently stands below 4%, while the average 30-year fixed-rate mortgage is at 6.75%, according to Bankrate.com. Three years ago, during the summer of 2005, the Treasury rate was in the same territory, but the average mortgage was a full percentage-point lower at 5.75%.
"The spread between mortgage rates and benchmark Treasury yields had been about 1.8 percentage points, and now it's about 2.8 percentage points," says Greg McBride, senior financial analyst for Bankrate.com. "For at least the next few years, we're in a world of wider credit spreads. Even once the credit crunch finally gets put to bed, that trend will not reverse itself overnight."
For consumers, this means that great financing opportunities will be slim. Anyone with a mortgage that's less than five years old will be hard pressed to refinance into something better, and when rates rise -- if the Federal Reserve responds to inflation pressures by hiking rates -- those trends will get worse before they get better.
2. Costlier Fees
Punitive fees and actions are likely to go from bad to worse. This is the continuation of a trend that has been a decade in the making, but banks that are watching delinquencies and foreclosures rise are going to punish even the best consumers.
Many credit-card lenders, for example, have leniency policies, so that they will waive a late payment fee -- and re-set any rate increases triggered by being a few days late -- once every six months. Recent reports from consumers indicate that some card issuers have changed their policy, and now allow just one mistake every 12 months.
On more serious issues, things will get even nastier.
Lenders are quicker to report problems to credit bureaus, are aggressively trimming credit lines, raising charges for over-limit activity and much more. And industry watchers say lenders are quicker to turn problem cases over to collection agents, and those agents are more aggressive in pursuing their quarries, hoping to catch them early -- when they have the ability to strike a repayment deal -- rather than waiting until someone is on the brink of default or foreclosure.
3. Tougher Scoring
The definition of a top credit score is changing. Credit scores are used in everything from setting lending terms to deciding whether a prospective employee is someone the boss needs to worry about. With defaults on the rise and lenders tightening credit, it takes a higher score to be considered a good credit risk.
So a consumer who might have been able to get top-tier credit deals with a score of 700 will now find themselves with the second-level deals, because their score is below 740.
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Think of it like being in school, where the score that was good enough to achieve an "A" grade is now bringing home a "B+" or worse.
4. Tighter Standards
Say hello to stepped-up income documentation and bigger down payments. It's not that the no-money-down deals are completely gone, but they will only be available to the select few with the very highest scores; for the rest of the public to qualify for the best credit deals, they will need to pay more upfront, complete more rigorous paperwork and shop around.
The best opportunities for savings may come from home-equity lines of credit rather than instant-credit-at-the-store promotions. And while retailers will still use same-as-cash offers -- with a set time period to pay with no interest -- consumers should watch those terms carefully as they may include additional charges or ways to trigger the interest payments.
5. Fewer Deals
In the era of easy credit, consumers could surf the offers they were getting. Today, those deals not only are less attractive, but they typically come with attached fees -- buried in the fine print -- that may eat up a lot of the savings.
In that respect, it's kind of like the credit crunch itself: The headline is the big news, but the fine print shows how the whole thing hits home.