Making it easier to get loans
We’re back in the "be careful what you wish for realm" and it’s something that’s been coming along for a while now. If you’ve been turned down for credit cards, car loans or home financing because of the tight lending standards put in place after the financial crisis, a door to the credit kingdom may have opened a little.
For a while now lending of all types, including mortgages, has become a little easier, especially for individuals who may have had judgments against them or just delinquent accounts. Recently, Fair Isaac Corp., which provides credit scoring analysis for banks, credit card companies and all lenders, announced that it will stop including in its FICO credit score calculations any record of a consumer failing to pay a bill if that bill has been paid or settled with a collection agency. In addition, less weight will be calculated to unpaid medical bills that are with a collection agency.
The intention is to boost lending while still keeping lending risk low for individuals who may be back on track to improving their credit but still suffer from low credit scores. For example, frequently credit reports could reflect bad debts for as long as seven years, even if the balance was paid off and other debts are up to date. Also, unpaid medical bills could end up as a default during the time an individual is still negotiation with an insurance company and not even be aware of it.
Although the medical defaults will target a limited number of individuals, the length of time other debts remain on a credit report being reduced will be a considerable help to many more. FICO credit scores are used by 90 percent of consumer and mortgage lenders and a low score significantly impacts not only your ability to get credit but also your interest rate. Borrowers with credit scores between 760 and 850 get mortgage interest rates of approximately 3.82 percent on a fixed-rate, 30-year mortgage as opposed to borrowers with a 759 score, who will be offered approximately a 4.05 percent rate. This will result in thousands of dollars more in interest paid over the life of the mortgage.
So, that’s the upside of making credit easier for consumers, but there is also a downside. Downgrading standards could bring people into the credit market and home purchasing market who should not be there.
With fewer loans falling into foreclosure at the lowest rate in eight years according to the Mortgage Bankers Association, lenders are again enticing homeowners into home equity loans or lines of credit. Generally home equity loans are for improvements in existing homes, but buyers are also using this method to piggyback on to new home mortgage financing.
During the first quarter of the year, home equity lines of credit were up 9 percent from last year, and interest rates dropped from 5.16 percent on average to 5.01 percent on average. It’s nice that this is happening but are we headed down the bubble road again? You’re not always doing someone a favor stretching the limits of credit, especially to marginal burrowers.
The kingdom of lending is opening its arms again to those of us who were somewhat delinquent, but the power needs to be used with a sharp knife not a mighty sword. Please don’t make me resurrect that horrible term “easy credit” again.