By Ron Oertell
The unemployment numbers aren’t pretty and the forecast for economic recovery is uncertain. As a result, lending is likely to tighten and credit for some will be harder to obtain.
Many households are readjusting their financial figures and budgets as the pandemic and its many effects on the economy continue. Credit could become more of a necessity for some in order to weather changing economic conditions, or it may not be the best scenario for others. Whether you’re in the middle of your working years, nearing retirement, or in retirement, various factors apply when weighing credit options.
How can consumers increase their chances of obtaining credit when they really need it? And what factors and options should they consider if they’re feeling a financial crunch that drives them toward credit or loans?
Limit the number of times you request credit
Generally, the more you request credit over a relatively short time span, the less likely you are to obtain it. Limit your requests to only necessary times. Under many underwriting models, the number of times you request credit over the most recent 30-day period can have an impact on assessments of your chances of repayment.
Communicate proactively with your lenders
This is critical. More communication early is better. Try to make a good-faith payment, even if minimal, and that will allow lenders more flexibility to work with you. Be knowledgeable of the programs they offer for flexibility, such as hardship programs including payment deferment.
Look for refinancing options
Find out about options that are provided by your current lenders, whether it’s refinancing for auto or mortgage. Sometimes you can get a lower APR, or a lower payment, and that’s important because payment-to-income (PTI) is often one of the attributes that are reviewed to determine whether somebody is a credit-worthy individual. If you are able to lower the overall payments you have to make per month, that’s going to have a beneficial impact on your ability to obtain credit.
Look for point-of-sale financing
This means financing options related specifically to the good or service you are trying to purchase. With point-of-sale financing, you have a much higher likelihood of obtaining credit related to that particular product than you would just generally obtaining credit for an undisclosed purpose.
Lenders who are much more familiar with products and services that you are purchasing have a specific view of repayment ability, and because of that, they may have more ability to advance credit. If they know the capital is going to that merchant for the product and service purchased, they have a higher likelihood of offering somebody credit than if they don’t know what the money is going to be used for. It’s also helpful to put down a larger down payment if possible. Then you are lowering the risk. It’s wise to finance only a portion of the product being purchased.
Monitor your credit
You can use free apps to manage your FICO score. Many banks and other financial institutions offer free credit monitoring. Research the bank for these products.
Pay down your debt
Your debt-to-income ratio (DTI) is a big factor in trying to obtain credit. A lower DTI is a positive attribute, and if you reduce your DTI, it opens up other opportunities in case you need to obtain credit.
Show ability to repay now
If you’re trying to obtain credit, showing your ability to repay is critical right now. Companies are going to look at more than just the FICO score; being able to document active employment and consistent income is going to be a larger indicator. Given high unemployment figures, many lenders have placed hard cutoff rules based on employment status and other factors. And over the next few months, lenders will continue to deal with the uncertainty of future credit-worthiness.
If you are nearing retirement, be careful regarding payments
Don’t lock yourself into long-term payments. Make sure there is no prepayment penalty on any credit you obtain. A lot of lenders will not have prepayment penalties. Given the unknowns of the market currently with the coronavirus, having flexible payments is a great idea.
Or, you may opt for lower payments if you believe your income is going to drop. This is especially important for those closing in on retirement, say within five years of it. If you are a near-retiree and you think your income is going to change, make sure you think about the amount of payment you need to make and your ability to repay. If you’re taking on a three- to five-year loan, are you going to be able to make those payments if your early retirement years with less income intersect with the life of the loan?
Remember that when considering credit, creditors that you have a long, positive history with are going to be the best people to obtain credit from. One of the biggest factors lenders are looking for is your history of repayment.
If you are retired, start early
Retired individuals often have higher FICO scores, but higher DTI and PTI ratios as incomes are often lower in retirement. It is important for individuals to demonstrate an ability to repay notwithstanding a lower current income. For these individuals, obtaining authorization for credit prior to the point-of-need is helpful since lenders will have more time to underwrite the credit and therefore take the retirement status under consideration. And again, having a solid credit history with certain lenders is a good reason to reach out to them in a time of need.
Remember, a credit score can be a lagging indicator. If someone is unemployed but has a good credit history, it may make it more difficult for them to obtain credit. Someone with a lower FICO score who is actively employed and can show a consistent income may have an easier time getting credit. If your credit score has dropped for a period of time, due mainly to unemployment, that doesn’t necessarily preclude you from obtaining credit. Re-employment and documentation of it can show lenders you have the ability to repay them.
About the author: Ron Oertell
Ron Oertell is chief financial officer at a major consumer lending company. He has more than 25 years of experience as an attorney, investment banker, investment fund manager and CFO, and has completed over $9 billion in capital transactions. The views expressed are those of Ron Oertell and not of any group or company to which he is associated.