How Consumers Can Win the Credit Game

Greg Vogel | October 6, 2009

It’s late 2009 and the consumer credit world is still in turmoil!  You have MANY new changes:

 1)   You have a new credit law, The Credit Card Accountability Responsibility and Disclosure Act of 2009, which partially became law in August 2009 and will completely become law in either February of 2010 or December 1, 2009 if Democrats have their way.

2)   You have a new FICO® score, FICO 08, which is now live and commercially available at all three of the credit reporting agencies. This new FICO score promises to do a better job of predicting future credit risk.

3)   You have millions of credit card holders who have seen their credit limits reduced, accounts closed, interest rates increased and/or their minimum payment requirements increased.

4)   In addition you have billions in lost home equity, which means no more safety net for those consumers who have excessive credit card debt.

5)   You have debt settlement companies aggressively marketing their services like vultures circling a dying carcass without fully disclosing the downside of possible lawsuits and severe credit damage to their customers who use their services.

6)   And finally, you have media and the undereducated that are spreading fallacies about the credit world, and are causing panic.

 

All in all, it’s a tough environment to survive and thrive in. Here are what I believe are the most important things that we consumers should be focused on over the next 24 months:

 

  • Continue to Improve Your Credit Scores
    • Continue to make your payments on time regardless of what you read or hear – Debt settlement companies would have you believe that the best way to serve you is to suggest that you stop making your payment to your credit card issuers. The theory is that a lender who isn’t getting paid might be more flexible for a consumer who isn’t making their payments. I guess it’s the “I’m lucky to get something” hypothesis. The problem is that many credit card issuers will gladly work with their debtors and work out settlements or payment plans directly, without the intervention of debt settlement companies.
      This helps them to collect more than what they’d get from a 3rd party settlement company and it will also mean that you are paying them more of what you owe them, which is a good thing. It will also protect you from litigation should the credit card issuer grow tired of you avoiding them at a debt settlement company’s request.
    • Pay down your debt to no more than 10% – The new FICO score, FICO 08, is more sensitive about your revolving utilization percentage, which is the relationship between your balances and limits on credit card accounts. This means those of you who are highly utilized will suffer more as lenders continue to convert to this newer credit score, and many have already made the switch. If you can’t get your balances to less than 10% of your credit limits then get them as low as possible and your score will benefit. Why is this important? It’s simple. Lenders are being more critical about credit scores than in the past 36 months. A good score, say 700, two years ago would have gotten you approved at their best deal a lender had going. Today it will get you approved but not with the best terms. Shoot for 750 to ensure you of the best terms. And, be aware that mortgage lenders not only want 750 but they also want a larger down payment in many cases.

 

  • More Cards Are Better, Shoot for Five –This is counter intuitive but we’re living in a bizarre credit world. Those of you who have less than five credit cards are in a bad position. A bad position because of a couple of reasons, which are:
    • You have fewer options if one of your credit card issuers changes your terms – Tens of millions of consumer have seen the terms of their credit card accounts changed adversely over the past 18 to 24 months. This means lower credit limits, higher rates, higher minimum payments and closed accounts in some cases. If you have only one or two cards then you leave yourself without options should one or more of your credit card issuers start misbehaving. And for those of you who think you’re immune from this because you have good FICO scores, think again. FICO released a study several months ago that showed that, at a 2 to 1 ratio, cardholders who saw their credit limits decreased had median FICO score of 770. Nobody is immune. With more cards you give yourself the option to move your business elsewhere and not lose the access to the capital that a credit card provides.
    • Think About Litigation If You Know You’re Right –
      Fair Debt Collection Practice Act (FDCPA) lawsuits are going to eclipse 8,500 this year, which will easily be a record. According to John Ulzheimer, a professional expert witness, “many consumer are finding that they can’t get legitimate errors corrected on their credit reports. The choice they have is to live with it for seven years or take someone to court and force them to listen.”Many collection agencies are finding it hard to avoid lawsuits despite a huge growth in outstanding delinquent receivables. Some are calling for a revamping if the FDCPA but any politician that chooses to reduce consumer protections at this time in history is asking to be voted out of office.