Keeping Your Credit Clean

There is a silver lining to every financial crisis. Sometimes the positive outcome is hard to find or may take years to appear, and this is true of the current credit crisis. Ten different “experts” would give 10 slightly different opinions about how it happened. Regardless of the reasons, consumers now are more aware than ever of their own credit situation and the importance of maintaining a high level of credit-worthiness.

Some would say that credit is the lifeblood of the economy, and I think the end result will be a credit system that is more efficient, wholesome and transparent — better for all consumers. In the meantime, what can you do if you are in a credit crunch? Here are two sample situations with advice on how to handle them:

Maintaining credit despite a reduced ability to pay

The economy is bad, it could get worse before it gets better, and jobs are being lost. If your job has been eliminated, you may find yourself unable to keep up with your bills. The good news is that many companies are willing to work with you to develop a payment plan that fits your situation.

If your mortgage is the problem, now may be a great time to refinance. Not only can you take advantage of very low interest rates (currently around 5 percent on a 30-year mortgage), but maybe you can lower your monthly payments.

If your car payment is the problem, your auto financing company should be willing to work out a new payment plan that reduces your monthly payment. This will extend the payment period, but can provide the relief you need right now.

If your credit card bill has become onerous, you may want to look into a balance transfer to a card with a 0 percent interest rate. Be careful, though, that there is no charge on the balance transfer itself.

Remember that the goal is to keep your credit score intact by not defaulting on any of these payments. This will benefit you down the road when you need to access more credit.

Getting credit for new purchases or refinancing

One of the byproducts of the credit crunch is the increased scrutiny on credit applications and the drying up of a once-abundant credit market. Banks and mortgage companies are taking a closer look at new applications for credit, both personal and for business purposes. That means that you will need to prove things such as income, assets and salary history when you may not have had to in the recent past.

Your credit score also will dictate the interest rate you receive on some types of loans. That could cost you real dollars if your score is below the company’s rating standards, which sometimes go by levels.

Another thing to keep in mind when looking for credit is that you may have leverage if you have a good credit score. Car companies are struggling to sell cars, so it’s a buyers’ market. If you have good credit, you may be able to secure a 0 percent financing deal.

If you want to refinance your mortgage, rates less than 5 percent have been available lately for folks with high credit scores. The banks look at you as less risky than someone with a lower score.

Keep in mind that your actions now can significantly impact your credit score down the road, which means you should do everything possible to make your payments on time. If that is no longer possible, try to make payment arrangements with your lender to avoid delinquencies.

There is no fault in trying to compromise and find a mutually beneficial deal. Remember that your lenders want you to be able to make your payments as much as you do.

James R. Miller, CFP, is senior vice president of Tilson Financial Group, an independent financial planning firm in Chapel Hill.

Categories: Finance, Money