Broken relationships: Consumer credit is out of balance

worried

By Alanna McCargo

Credit is a fundamental part of our financial picture. It involves trust, willingness and capacity to pay what you owe. Your ability to pay back what you borrowed – usually with interest – and to do so on time, creates trust and earns you a good credit rating in return. Today, many people are maxed out on their credit, and failing to pay back what they borrowed. Finances are shattered, relationships (between consumers and creditors) are fragile or broken, and faith is being lost in the credit system. Even worse, credit is being leveraged for basic necessities like food, gas and shelter as many are cash strapped or stretched. This is a serious problem for the overall economy, because when consumer credit remains strained, buying power is minimized and creditors may tighten up and not lend money as judiciously. In addition, companies will continue to have uncertainty about profits and will not hire employees or may be forced to lay off more workers because of the slow down. It’s a vicious cycle. Credit does play a big part in consumer spending and is critical to the health of the overall financial system.

Consumer credit outlook is unbalanced
According to the January 5 Federal Reserve consumer report, the rate of consumer credit growth was at 8.5 percent, up from prior months. On the flip side, there has been no significant growth in salaries or wages, and overall savings growth took a sharp dive according to the Fed. Consumers are growing their credit faster than the overall economy is growing, which could be an indication of many things, the worst of which is borrowing money and tapping all credit available to pay the basic bills. Over-extension on credit is costly and dangerous. The extension of credit use could be an indicator of consumers having tapped out savings, overindulged during the holidays or ultimately being broke.

Stay focused on your credit standing

In this delicate credit environment and with the volatility of the overall economy and job market, it’s important that focus remain on managing credit and staying in a trusted position with creditors. Bottom line – pay the bills and pay them on time, even if is only the minimum payment. When times get tough, especially if you have been out of work, it may seem like there is no other option available. A few bad things can happen if you mismanage your credit during this tough economic period. First, creditors get very tight about lending any money at all when they are not getting repayment. This means you lose buying power or the cost to borrow goes up significantly. Second, your credit rating takes a big hit and you lose credibility and opportunity when it comes to things like future buying, employment or starting a business. Your potential to build wealth is impacted. Credit ratings are a reflection of who you are and what you are all about. People go through tough times, but that isn’t going to be forgiven when that new employer runs your credit and sees a distressed mess. In addition, people with good paying jobs may lose them if their credit deteriorates. For example, many jobs in the military or government field require security clearances. In order to maintain the clearance and the job, credit needs to remain in good standing. We should all be looking at credit as a serious relationship, ensuring that trust is maintained. Once you lose it, it tends to have a ripple effect through your life, putting your overall financial health and future in great danger. Moreover, it’s really hard to get it back on the right track, but it can be done.

Tips for a healthy credit relationship:

  • Keep your commitments– Pay your bills on time, even if it’s just the minimum payment due, make a payment and show good will. You made a commitment when you borrowed money, and you need to stay true to it. If you are able to pay your bills off in full each month, this can be a boost to your credit score. Carrying revolving debtcan deteriorate your score over time.
  • Communicate regularly – Contact your creditor if you cannot pay the full amount you owe. Often, creditors can work with you on a repayment plan or you might even be eligible for forbearance (relief from full payment of a debt) for a period of time, particularly if you are unemployed. You have to keep communication flowing with them if you want to keep good faith. Don’t be embarrassed or shy because you are not alone in this.
  • Treat your credit like it’s your job – Many employers are requiring credit and background checks to fill positions at all levels. Your credit is an indication of who you are and is used to define your worthiness. If you are not managing your credit, you are going to be overlooked for jobs. Your credit report should be as impressive as your resume and skills for the job.
  • Don’t be late for important dates – Your credit score can drop significantly if there are long periods of delinquency reported. If you are 30 days or more behind on a payment, get in touch with your creditors and make a plan to catch up. The longer the duration of your delinquency, the more severe the hit to your credit score will be.
  • Always know where you stand –You should be regularly reviewing your credit report and know where it stands. Everyone is entitled to a free copy of their credit report from all of the reporting agencies once per year. Review your credit report and score at least once a year to ensure it is accurate and find out what your credit score is. Finding out what your credit picture looks like because you’ve been denied a job or unable to get financed for a car or house is not the right time to become informed. You should always be in control and aware.
  • Build a safety net –Do not rely on credit alone for buying power. Saving is critical, and nothing is better than buying with your own cash with no interest. Although that isn’t always an option, it’s imperative that you keep perspective and balance between use of credit and use of cash. If you seem to be tapping into credit more because cash funds are low, you probably need to reconsider how you are spending and refocus on your savings plan. Remember, debt does not create wealth.

Sources:

Board of Governors of the Federal Reserve System – Consumer Credit (http://www.federalreserve.gov)

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