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Credit And The Consumer: Taking A Proactive Approach
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Many consumers are becoming more aware that they need to take a proactive approach when understanding their credit and searching for ways to improve credit rating. By becoming more involved and taking the appropriate actions, they can effectively raise their credit scores to make themselves more attractive to potential creditors. The immediate benefits are more products and services that may become available, plus they can save money. By adopting a proactive approach, they may be helping themselves in other ways, too.

What Are The Additional Benefits Of Understanding Your Credit?

Understanding your credit and having a general knowledge of how the credit industry works will provide benefits that go beyond learning ways to improve credit rating. Let us illustrate with the following example of two consumers looking to obtain financing:

Ken Customer has been renting for several years and wants to buy a home. He has taken an active role in finding ways to improve credit rating, manages his debts in an optimum manner, and has very good credit scores. He speaks to Larry Loan Officer at XYZ Bank to inquire about a mortgage. Larry is very impressed at how well-versed Ken is about credit and knows he is dealing with an educated consumer. Larry takes time to answer all of Ken’s questions and lays out all of Ken’s financing options to give him the best deal possible.

Henry Homeowner has owned his home for several years and wants to refinance his mortgage to take advantage of the historically low interest rates that are currently available. He had purchased his home when credit standards were a lot less stringent and never took the time to fully understand his credit. He has not taken a proactive approach to finding ways to improve credit rating and has made a few late payments along the way. His credit scores are marginal at best but still high enough to qualify for a mortgage. He also speaks to Larry Loan Officer at XYZ Bank, who will earn extra commission today if he sells an adjustable rate mortgage. Larry knows that Henry would probably benefit more from a fixed rate mortgage but decides to really talk up the adjustable rate mortgage. Henry chooses in favor of the adjustable rate mortgage and misses out on the opportunity to lock into historically low fixed rate payment for the life of his loan.

Do These Scenarios Happen In The Real World?

An emphatic and resounding YES would be the answer. One of the premises of the current credit crisis is that creditors were steering customers away from traditional loan products and selling them riskier products that were more profitable for the creditor. These subprime products allowed the borrower to qualify for more financing and were less stringent in the verification of the borrower’s income and assets.

Borrowers found themselves stuck in mortgages that they could no longer afford once the variable interest rates reset to a higher rate. When home values declined, they could not refinance or sell the property, and this has helped fuel the ongoing foreclosure crisis.

Consumers who understand and improve their credit may be less likely to fall into Henry’s situation and avoid getting into the predicament of the recent credit and foreclosure crisis. History has shown us that these crises happen periodically. However, the one we are currently experiencing is especially severe. Consumers who protect themselves by understanding credit, look for ways to improve credit rating, and effectively deal with creditors have the best chances of financial survival in this ever-changing world.


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