In this post, I will direct you to some new developments relating to getting and using credit based on material we have come across in our research in developing our weekly posts. There are some great nuggets of information presented — please enjoy.
Credit Score Levels
In the FinancialVerse, your credit score is used to help numerous third parties make decisions to grant you credit or insurance coverage. Your scores can range from 300 (bad) to 850 (excellent). Financial institutions further classify your scores into five categories or borrower risk profiles based on your credit score. (Please note that each organization uses their own methodology in classification) These categories are normally: super-prime, prime, near-prime, subprime and deep subprime.
These names describe where you stand in comparison to other borrowers and depending where you score falls you qualify for the best interest rates and product benefits. Overall, the categorizations are meant to help both lenders and borrowers understand what kinds of credit products you qualify for, what kind of risk both parties take on and how terms like annual percentage rate of interest and the size of your loan are determined.
The federal government’s watchdog agency — The Consumer Financial Protection Bureau (CFPB) — breaks down the five different types of borrowers by credit score as follows:
Deep subprime (credit scores below 580)
Subprime (credit scores of 580-619)
Near-prime (credit scores of 620-659)
Prime (credit scores of 660-719)
Super-prime (credit scores of 720 or above)
As you seek to obtain credit or borrow money you should know ahead of applying where your credit score falls. The category you find yourself in can be an important determinant of your access to credit. Naturally, the higher your classification the more benefits you will likely qualify.
The Credit Card Landscape
Experian, one of the credit reporting bureaus, periodically publishes research about credit cards and how they are used. Here are the highlights from their latest report published in November 2019.
61% of Americans have a credit card
The average American has 4 credit cards
The average credit card balance was nearly $6,200
The average credit card account age was 87 months
The average borrower had just over $31,000 in credit card limits
So how do you compare to the national statistics?
U.S. Credit Card Debt Down To $769 Billion
For the week ended May 20, The Federal Reserve Bank reported that the credit card debt U.S. banks held on their balance sheets was down from $860 billion at the beginning of March. The last time Americans owed that little credit card debt was at the beginning of 2018. It appears the reason credit card debt has shrunk so rapidly is that Americans have cut their spending even faster than they have lost their jobs.
The 10.5% drop in the space of 11 weeks is the steepest decline in American credit card balances on record.
Financial Institutions are Tightening Borrower Qualifications
In economic challenging times, lenders tend to focus on issuing the types of loans that have the lowest risk of loss. They usually tighten their business practices and who they extend credit to. According to a recent survey by CompareCard, one in four American credit cardholders said at the initial height of the pandemic they’ve involuntarily had their credit limit slashed on at least one of their credit cards or even had a card closed by their issuer in the past 30 days.
The key findings of the CompareCard survey were:
25% of credit cardholders surveyed saw their limit slashed and/or their card closed altogether in the past 30 days.
3 in 10 cardholders are using credit cards “more than ever” since the beginning of the coronavirus pandemic. Forty-two percent are using their credit card the same as before, and 27% are using their card less.
41% percent of Americans don’t know that their credit card issuer can generally cut their credit limit without notification.
This survey points out why you need to understand the terms and conditions governing use of each of your cards. This includes the right of the financial institution to unilaterally lower your credit limits without notification.
Given the enormous impact of COVID-19 on the American economy — especially the unprecedented spike in unemployment that has occurred — it is no surprise to see banks reining in lending. Something similar happened a decade ago when lenders slashed credit limits and closed card accounts at the outset of the Great Recession.
The world of credit is always changing, particularly during a negative economic event such as the COVID-19 pandemic. Please stay on top of your credit scores and all your available credit lines to make sure you understand your related rights and privileges. You just never know when you will need that available line of credit to tide you over in an unplanned financial emergency.
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