BusinessWeek’s Prashant Gopal just commented in a concise article on a trend gaining strength over the last several months: the decline of credit scores in the major rating agencies TransUnion and Experian.
As we’ve previously written, a low credit score negatively impacts one’s ability to do a variety of transactions, even some things seemingly unrelated at first glance. These include:
“1. Mortgage modifications. With limited funds each month, one needs to come up with a game plan to repay both mortgage and non-mortgage debt. But with strain on monthly budgets, renegotiating with one’s mortgage lender to come up with modified terms is an option. For those counting on averting foreclosure by securing new repayment terms, keep in mind that lenders will incorporate your credit score into their decision-making process on whether or not to agree to a modification and what the terms will be.
2. Rental homes. Landlords check the credit scores of those it considers for a rental place, and the score can significantly influence their decision. For those searching in an expensive metro area that’s also close to the office, the score can make or break one’s chances of landing a coveted apartment.
3. Employers. A large array of employers now do credit checks, and some even request one’s credit score upfront to avoid shouldering the cost of running the formal report. Debt repayment can be seriously affected by the inability to land a job and the cash flow that comes with it.
4. 0% balance transfers. If you’ve determined that a zero percent balance transfer is going to be part of your strategy to eliminate debt, then keep in mind the latest trend among credit card lenders: using one’s credit score as a basis to determine a wider range of balance transfer terms, including the number months for which the 0% rate will stand, whether or not new purchases will enjoy the 0% rate, upfront fees to be charged simply to execute the transfer, how much can be transferred, and even the post-zero percent period interest rate to be charged, which can top 30%.
5. Mortgage interest rates. Modifications aside, the final interest rate that a mortgage lender will agree to is going to be impacted by your credit score. This includes homeowners in both the sub-prime and prime categories.
6. Car insurance. All states set minimum auto insurance amounts that one is expected to carry, so if you drive a car, you’re legally obligated to buy coverage. But since insurance companies have identified correlations between credit scores and being accident-prone, one’s score is being taken into consideration when setting the premiums you have to pay.
7. Credit line reductions. A new trend among credit card lenders is to involuntarily reduce one’s credit line. In fact, there is a forecast that credit card companies are going to slice off a large chunk of outstanding credit limits over the next year to reduce their risk. Credit scores will significantly affect their decision-making process of whose lines to reduce and by how much. If you have outstanding credit card debt that exceeds their new, lower limit for you, not only do you have to pay it off but you can get unexpectedly hit with overage fees for spending above your limit.
8. HELOCs. Home equity lines of credit have tax advantages and typically contain interest rates that are much lower than those on credit cards so for those with outstanding credit card debt, a HELOC might play a role in one’s strategy of debt repayment if there is a clear plan to use it as a tool to quickly paydown one’s outstanding debt. However, not only are HELOCs tougher to obtain in the current economic environment, but credit scores strongly affect a lender’s decision. As a side note, those who are insecure about their ability to keep their home should be aware that one’s home is placed as collateral to back the line of credit.
9. Repayment of medical services. Yes, if you have obtained medical services that you have an obligation to pay for, then your credit score can impact the terms of repayment.
10. Consolidating private educational loans. If you have decided that consolidating your outstanding educational loans is going to be one your approaches towards eliminating debt AND some of your educational loans are privately held, then your new, consolidated interest rate will depend in part on your credit score and a lender can even deny consolidation based on a low credit score.”
But now, even businesses with top-notch financial behavior are experiencing painful credit score readjustments that interrupt business activities. The key point of the BusinessWeek article is that some causes of drops in a credit score are outside the control of an individual or an organization. That said, remedies exist, and include:
- creating an emergency business fund to facilitiate cash flow if a credit line is suddenly cancelled or scaled back
- using your organization to “play the credit score game” similarly to how an individual does by periodically charging small amounts on a credit line to keep the transaction history fresh whilst paying off the outstanding balance religiously
- for business purchases in which a credit card number is required (e.g. plane tickets), opening a check card account in which a credit card number substitute draws directly against an account stocked with cash.
Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.
Tags: credit score trend, credit scores dropping, lower credit scores
