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Sunday, November 23, 2008

Daily Observation - Your Credit

Tonight since it is Sunday when I 'm writing this blog there are no new SBA Updates so I thought I would change the topic and editorialize for a bit. We need to take some action to help prevent what is occurring to every one's credit.

I don't believe the issue that I am going to share with you is an isolated one, and maybe just maybe we can get some political press to help support our claims.

The average person today is facing this situation and we need to act to get it halted. As the value of peoples property which the lenders have takes as loan collateral have been reduced substantially over the last year, their overall credit is being affected drastically because the lenders have limited their amount of exposure to borrowers running up more and more debt. I applaud that situation because the lenders are looking out for themselves which they always do, and so they say they are protecting you and I from going further into debt. A noble response, if I have ever heard one.

But here's the problem. If you are aware and understand the credit scoring models you will immediately see the self-fulfilling prophecy the lenders are creating. They are stating that more and more borrowers are having credit issues so the lenders are freezing credit. Their rationale for freezing credit is that the reporting agencies are lowering credit scores due to the economic situation. However by the lenders lowering your available credit, the ratio to used credit to available credit increases significantly, and that increase causes the credit bureaus to lower your credit score even more.

For example lets say you have a $100,000 line of credit and you have borrowed $25,000,which is a 25% ratio of credit borrowed to available credit. Now the lender arbitrarily reduced your line of credit because your home value statistically may have fallen. So lets say they reduce your line of credit to $50,000, you are now at a 50% ratio, without you doing anything. That original 25% ratio is now at 50% which is going to lower your credit score. Now if the lender freezes your credit at $25,000 you are at 100%; which will significantly lower your credit score.

We need to let the lenders freeze your account if it is waranted but not alter the amount of available credit so that credit scores are not being affected. If the lenders want to protect themselves let them block further usage of credit till collateral values return but don't reduce available credit on paper. The credit score models would not be effected, and the lenders would be protected. A win - win scenario!

For more on the 5C's of credit opt in to receive our 10
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1 comment:

Shella said...

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


Deborah

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