Bad Credit Score Still Impedes Credit Card Approval

The Federal Reserve recently reported that banks have been easing their lending standards with their credit card offers. Unfortunately, this doesn’t apply to consumers with a bad credit score who are unlikely to get approved for new cards in the near future. Because banks continue to practice tight lending standards for consumers with poor credit scores, Moody’s Investors Service expects the default rate on low interest credit cards to drop next year to a 20-year low.

Credit Card Default Data

A cardholder’s balance goes into default and is charged off when the issuer deems it uncollectible. In 2009 and 2010, the top six banks which issue cards had defaults totaling $74.5 billion. These are the household names of credit-card issuers: Bank of America, Citigroup, JPMorgan Chase, Capital One Financial, American Express and Discover Financial Services.

Banks Ease Up For Some

A survey released by Credit Land recently revealed that banks have been easing up on lending standards, including approval of credit card applications. But this does not mean they are stretching their lending practices for consumers with poor credit scores. And especially not for consumers who were unable to pay their bills and were among the default accounts.  Banks have seen delinquency rates decreasing, though, as consumers improve their bill paying habits. Consumers who are paying their bills on time are the ones reaping the benefit of eased lending practices among banks. As for consumers who have recently had cards cancelled for lack of payment, it’s unlikely they will be approved for a new credit card anytime soon. But there are credit cards for bad credit, which could help consumers in repairing their credit history.

Moody’s Expects 20-Year Low

As banks tighten their lending belts for consumers with poor credit scores, Moody’s predicts a decrease in default rates. By denying high-risk consumers new lines of credit, banks are decreasing the number of balances they will have to charge-off in the future. An improvement in delinquency rates is also a sign that default rates should improve as time goes on. These factors have led Moody’s to predict a 20-year low of credit card default rates by next year.


Know Your Debt-To-Income Ratio BEFORE Applying for a Mortgage

When you are hoping to get a mortgage or other loan, you know that a potential lender will looking carefully at your credit score. But did you know that they will also be examining every aspect of how you use credit?

Debt to Income Ratio for Mortgage

Before you apply for a mortgage, be sure to calculate your debt to income ration for your proposed mortgage and consider these other factors and how they will affect your overall debt to income ration and your budget.

How much do you owe vs. how much do you make?

Examining how much you owe vs. how much your make (your debt-to-income ratio)  for a month can be helpful, especially when it comes to understanding a lender’s perspective. A high ratio can send a signal to lenders that your monthly expenses are unmanageable, and that your overall budget will not support a loan repayment. This can obviously discourage a lender from giving you money. In addition to your credit score, your debt-to-income ratio is a primary factor used by lenders in their review of a loan application.

Your debt-to-income ratio is easy to calculate. Simply divide your total monthly debt by your total monthly income. Use your gross (rather than your net) income – it’s the figure most lenders use. The debt figure encompasses those reported to credit reporting agencies, and can include your utilities (as well as any installment loans).

What lenders want

While lenders use different criteria, a good, generally accepted rule of thumb is this: no more than 28% of your income should be allocated for a mortgage payment. The upper limit for this figure is 33%.

What are the possible effects of your debt-to-income ratio? If shopping for a home, it limits the amount you can potentially spend. If your debt is extremely high it can cause you to be denied – even if your credit score is good! But take heart – there are things you can do to increase your chances of securing a loan.

First, look at any installment loans you’re currently carrying. This includes car payments and student loans. Generally speaking, lenders won’t count installment loans against you, as long as you have 10 (or fewer) payments remaining on the loan(s). So, before heading out to secure a loan, improve your standing by paying any installment loan down as much as possible.

Then, make a completely realistic examination of your budget. If getting a loan is important to you, be brutal. Find areas where you can cut back; don’t be afraid to get creative!

  • Consider bundling your Internet and cable TV services.
  • Are you really using that gym membership, or is it just a psychological prompt for you to get some exercise?
  • Determine your priorities, then look at where you can reasonably cut back on expenditure.
  • Pay down credit card balances (no, you don’t need to close out the cards; doing so can actually work against you).
  • Save money for possible emergencies – remember, experts say that it can’t hurt to have as much as a full year’s income in reserve.
  • Avoid making major purchases, such as a new car or furniture for the home you’re hoping to buy.

If you’re unable to get your expenses in check, strongly consider getting help from a qualified financial adviser. Select someone with whom you can be completely forthright about your monthly expenses. They, in turn, will help you get yourself immediately – and permanently – on the right track. If your goal it to buy a home, check around.  Some banks have programs for people who need credit counseling to get on track to get meet that goal, they might be willing to lend you the money to buy once you have completed the program.

Before you take on a new commitment, it is important to change your way of thinking about debt. This will not only help you qualify for the loan, but assure that you will be able to comfortably make the payments too.\


Building the Perfect Credit Profile

There’s a lot of advice available online about building the perfect credit profile.  Every financial advisor, weekend blogger, and credit repair service seems to have the one solution that’s guaranteed to work for your credit report.  How many credit cards you need, what types of accounts are best for your score, how many inquiries you should have – the list goes on and almost always looks different.

Here’s one more ingredient to the massive stew of credit advice available online, while at the same time diluting out all of the unnecessary “tips” to help you build the perfect credit profile.  Hope you brought a bib, things could get messy.

Take a breath

The first piece of advice might seem a little unconventional, but hear me out: Don’t worry so much about your credit profile.

If you’re fretting over your credit scores to the point that you are eyeing your credit score through a microscope every other Friday, do yourself a favor and stop.  Generally speaking, consumers who obsess too much over their credit profiles could only be harming themselves – especially if they’re prone to opening credit accounts one day and closing them the next if they don’t see an improvement in their scores.

They could also be the type of consumer who reads all those finance articles that offer conflicting opinions on managing credit (seriously, ask any 5 of them what the best way to get out of debt is, and you’ll somehow wind up with 6 different answers, but I digress), and so wind up following all their differing tips and screwing themselves over.

What your credit report needs

Folks, here’s exactly what your credit profile needs to be the best it can be:

  • A mortgage.
  • A car loan.
  • No more than 4 open, good credit cards.

Your creditors and lenders are looking for more than just a high score when they pull your report; they’re looking to see how good you are at handling money.  That doesn’t stop with paying your credit card bills on time (although you certainly want to keep paying them) – it also extends to how well you handle various types of accounts.

Your credit report should include a mixture of both revolving credit accounts (the credit cards) and installment accounts (a home loan, car loan, or even your student loans), all in good standing.  This shows lenders you’re good at handling different types of financial accounts, and makes them more likely to agree to a loan application.

Credit cards and your credit report

How many credit cards you should have for your credit report to look its best is a tricky subject.  Opinions vary wildly on how many cards you should actually have, as well as what types of cards they should be, what your balances on each of them should be, etc.

For my part, I recommend you always keep at least 4 good credit cards open.  If you’re unsure what types of cards to get, I recommend you stick with Visa and/or MasterCard – preferably through your bank.  If you don’t have any cards open in your name, look into opening secured credit cards with your bank.  They work just like regular credit cards, but require a deposit to activate and are available to just about anyone.

Once you’ve got your 4 cards, my advice for making the most of them is to use 2 cards sparingly, and to carry no balance at all on the other 2 cards.  Charge a tank of gas or a trip to the grocery store to the latter 2 cards every once in a while to keep them from closing due to inactivity.  This helps keep your credit utilization down – something creditors love to see on your report.

I recommend using your 4 credit cards like this because FICO – the firm who assigns you the credit score most used by creditors – looks at not only your individual credit accounts, but your cumulative profile as well when determining your credit score.