Editor's note: This is a guest post by Steve Sildon
It's no secret that Americans are facing a major shift in the financial landscape of the country. In the aftermath of the bank and automotive bailouts, the days of applying for a loan or credit card and getting instantly approved appear to be over. Although the picture isn't entirely grim, there certainly are some seismic changes being made in the way that banks are lending money.
Until recently, easy access to credit has been one of the hallmarks of American life and overspending has been the name of the game for many of us. Owning an expensive car (or two), an overpriced home and a plethora of credit cards to buy all the items that we really don't need has led many of us to a financial precipice. People have frequently borrowed more on their homes than they were actually worth. Having a credit card issuer increase your credit limit to more than you could afford was a common occurrence.
To top it off, getting a credit card, loan or line of credit was as easy as filling out a simple application. As was the case for many years in the mortgage market, banks were doing a lackluster job of verifying income on credit card applications, if they were even bothering to verify income at all. For years, applicants have misstated their income levels with impunity, putting down as much income as they thought was necessary to get approved for a credit card. As long as the applicant's credit score was adequate enough, a bank would approve the application at a limit that was sometimes much more than an applicant could handle.
Banks who issue credit cards weren't the only ones who were letting consumers borrow more than they could pay. Automotive and real estate lenders were just as much to blame. The economy has thrived over the last several years led by an overinflated real estate market that gave people a misguided sense that we all had money to burn at our leisure. According to Greg McBride, senior analyst at Bankrate.com, we're about to see a major change in our way of life. "I think we're undergoing a fundamental shift from living on borrowed money to one where living within your means, saving and investing for the future, comes back into vogue. This entire credit crunch is a wakeup call to anybody who was attempting to borrow their way to prosperity."
The low interest rates and spendthrift psychology of the past 20 years have created a climate where people are overextended way beyond their means. In an attempt to minimize their risk and exposure to potential defaults, many banks and lending institutions have sharply curtailed their lending activities and have made it far more difficult to get credit for both consumers as well as businesses. As a result, the sweet deals that consumers saw years or even months ago are few and far between.
Although Congress tried to regulate the federal banking and credit reporting agencies back in 2003, the law was not nearly enough to prevent the current overextension. The Fair and Accurate Credit Transactions Act enforced by the Federal Trade Commission requires credit card and insurance companies to include a disclosure in all pre-screened offers delivered to potential customers. You've probably seen these arrive at your home with "instant approval" and "low interest" claims plastered all over the envelopes. These unsolicited offers are sent in droves through the mail. Even with the disclosures overtly displayed, the offers only continued to attract more and more applicants who were excited to get the credit and didn't stop to think about the implications of overextending themselves with the easily available credit.
In response to the deluge of complaints about unsolicited offers that many consumers were receiving almost on a daily basis, the 4 major credit bureaus launched a joint venture called OptOutPrescreen.com. Launched in 2006, the service enforces a rule of the Fair Credit Reporting Act (FCRA) that gives consumers the right to "Opt-Out" of credit card solicitations permanently. Many people don't take the time to do this though.
Many experts think that having the Fair Credit Reporting Act amended to require consumers to "Opt-In" (instead of "Opt-Out") a credit card offer list would do a whole lot more to help the problem with most credit card offers. If a customer really does need a credit card, he or she could apply for a card in person at their bank or credit union, apply online at an institution of their choice or call in to a lending institution. Doing this would change the way credit cards are seen in our society. Credit card approvals would be reduced because less people would be applying. Banks would have to be more competitive with their rates, which would be good for consumers. Changes like this, however, would require major legislative changes from Congress.
In the meantime, loans of all types are being threatened. The first to feel the impact were the automotive lenders. In the fall of 2008, GMAC starting capping auto loans at the unheard of credit score limit of 700, leaving anyone with a credit score under 700 unable to purchase a GM vehicle at all. Auto makers have slowly started to relax their lending standards. As of this writing, consumers with credit scores of 621 and higher can qualify for a loan with GMAC. While the terms and the interest rate might be more expensive with a credit score in the low 600's, consumers can still qualify. The change came just a day after the U.S. Treasury announced that over $6 billion would be awarded to GMAC in order to stimulate the economy.
When it comes to buying a car, you may be in luck if you have good credit and plan on borrowing through a credit union. In January, a program called "Invest in America" was introduced to credit unions around the country, allowing credit union members to purchase a GM or Chrysler vehicles with special perks. As long as the member uses their credit union to get financing, the can take advantage of these special deals. Chrysler customers can receive up to $1,000 in bonus cash plus other incentives for taking part in the program, depending on the model that the purchase.
Surprisingly, even retail store credit cards are becoming harder to obtain. Traditionally, department store, gas station and retail store credit cards have been among the easiest credit cards to obtain. Times have changed, however. Credit cards from retail locations are handled in one of two ways, either in-house or through a financial institution. HSBC, a national bank, handles the operations for a number of retail credit cards, but due to the grim financial climate, they will reportedly be reducing and in some cases even eliminating the instant approval feature on many of the retail cards that they handle, raising their standards to exclude more borrowers. Retail credit cards haven't disappeared completely, but they are definitely more difficult to obtain than in the past.
Wal-Mart is considering handling their credit card offers in-house as well, which should end up being better for consumers overall. A credit card program that's handled in-house by a merchant gives them the ability to assign their own credit terms and determine who gets approved. Although Wal-Mart's cards are currently handled by a 3rd party bank, the news of market leading merchant's card program changes are a strong indication of where retailers might be headed with their own credit card programs.
If you need to obtain credit during these lean times, you still have a few different options, but maintaining and improving your credit score has never been more important than it is right now. Lenders are raising their requirements and tightening their lending criteria significantly in all areas of commerce. Do everything in your power to improve your credit score. Above all, ask yourself if you really need the credit you're seeking right now. All of us are being forced to make drastic changes in our consumer behavior right now, but if we can make adjustments in our lifestyles even more rapidly, we could be much better off in a shorter amount of time.
Lenders are forcing us to change our behavior, which like it or not, should result in positive changes for everyone. If we can quickly adapt our mindsets and permanently change our behavior with respect to borrowing and credit, we can more readily accommodate this dramatic shift in lending. Those of us who are unable or unwilling to make changes will continue to suffer the dire financial consequences that so many others are now suffering from. For those that can rapidly adapt, despite the current economic gloom and doom, they will be better prepared and well-suited to deal with and even prosper over the long haul in our ever-changing economic world.
About the author: Steve Sildon is the Managing Editor for Credit Card Assist. Steve is a frequent guest writer and contributor in the blogosphere, writing about personal finance topics such as debt consolidation, credit cards, and home loans.
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