Borrowing Money Can Still Be an Advantage if Managed Wisely

Lessons learned from the recession

When it comes to borrowing money, Americans are getting a good lesson in the new rules. Pre-recession credit was thought of as a tool available to almost everyone. People used their credit for a wide variety of things, seeing its convenience as a major advantage to their monthly bill payment plan. For this reason, there was estimated $3.5 billion in open credit for US consumers in 2006. Then the market began to decline.

It was a wake up call of sorts when the recession first began. Martha Coleman, consumer in Pittsburgh, Tennessee said, “I had always thought of credit cards as safeguards against financial disaster. If I didn’t have the cash up front, I charged it. I always mentally knew if the money wasn’t available I had a credit cushion to save me.” Coleman soon learned that “credit cushion” was gone when her credit card company slashed her limit at the height of recession. She added, “It could not have come at a worse time because I got laid off. I was counting on having extra credit to tide me over and suddenly it was gone.”

How the recession changed credit

The recession greatly changed how consumers manage credit. When it comes to purchasing big-ticket items, almost everyone needs to have credit. Homes, cars, appliances and electronics are all normally financed. The biggest problem however is when people use their credit cards to pay for small expenses too. Gale Frampton, analyst for Crohn’s and Dackman, said, “Everyday expenses normally only drive up your balance and do little to actually help you. If you are buying a $30 item, why stretch the payment out over a few months? If money is that tight, then don’t buy it at all.”

It’s a hard lesson consumers learned via the recession and how credit lenders responded. To mitigate damages credit card companies slashed limits and increased interest rates to unmanageable amounts. The problem was that an abundance of sub prime borrowers forced credit card companies to turn to their good-paying customers, to find as much profit as they could. Many people who were borrowing money wisely felt that they were being penalized undeservingly. Frampton added, “Bad borrowers bowed out of the game early, leaving good borrowers holding the bag. Credit lenders realized that if they weren’t hard on their good customers, they wouldn’t make any money back.”

How to manage credit now

When it comes to post-recessionary credit, there are new rules to follow. One the most effective ways to manage credit is to pay down balances. Craig Watts, spokesman for FICO, said, “The overall effect of paying down credit balances is based on an individual basis…but depending on a consumer’s overall credit profile, he or she could push their score to the 700 range just by paying it down.” The reason for this is because 30% of a credit score is based on “credit utilization.” That term is used to gauge the amount of credit being used versus the total amount of credit available. For example, if a consumer has $5,000 in debt and an open credit line of $10,000, then their credit utilization is 50%. That percentage is what creates about one-third of a credit score and the lower the credit utilization ratio, the higher the overall credit score.

Another tip for consumers is to always make payments on time. The chronically late payer is doing nothing but hurting his or her score. For example, Watts also pointed out that paying all bills on time for just one month could potentially “boost a credit score by as much as 20 points.” Overall the two biggest tips when it comes to managing credit are to pay down balances and pay on time.

Figuring out credit for positive results

Borrowing money does not have to be detrimental to a credit score. Credit cards are meant to help consumers, but the new face of credit lending forces them to be wiser about management. Credit card lenders are strict these days, but if a consumer knows how to maneuver their accounts they can still walk away with a positive outcome.

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