With the latest move by the Fed, I have received many questions about what will it mean, and by when for all of us in the real world. The Federal Reserve has cut interest rates by 50 basis points. I will give you my 2 cents on what exactly you can expect and what you need to be doing about it for your finances.

Action: Home Equity Loans

How Soon Will You Be Affected? 1 or 2 Billing Cycles

   The latest rate cut will eventually mean lower borrowing costs for those of you who have a Home Equity Line Of Credit (HELOC). Most of these loans are indexed to the prime lending rate. This rate moves in tandem with the Federal Funds Rate.

    Rates on new home equity loans are a bit trickier to predict where things are headed. These loans don’t follow the Federal Funds Rate. Also, these loans tend to have fixed interest rates.

Action: Mortgages

How Soon Will You Be Affected? Impossible To Know

   The recent rate cut will have an unpredictable effect on mortgage rates. The banks and lending institutions are still “freaking out” and are processing VERY few new loans. At this time it is impossible to tell when – or even if – rates will come down. I suspect they will due to the simple fact that we have to get the flow of credit running again and start to stabilize the housing market.

Action: Car Loans:

How Soon Will You Be Affected? Be Afraid, Be VERY Afraid!

   The rate cut will probably not factor into any kinds of savings for car buyers. As many readers of my Crushing The Credit Bureaus         e-book will remember, my ex-father-in-law used to own a Ford Dealership. He tells me that we are at the beginning of seeing a meltdown in the car business like we have seen in the residential housing market.

   He mentioned that his colleagues are telling him that to get someone approved for a car loan, many of the major auto finance companies are requiring  a FICO Credit Score of 720! That is huge. Less than 15% – 25% of the population have credit scores that high. 

   If the already troubled auto industry can’t sell their vehicles and inventory start to pile up, how long do you think it will be before some of those corporate giants will need a government bailout? YIKES

Action Credit Cards:

How Soon Will You Be Affected? 1-3 Billing Cycles

   This gets a bit tricky…since rates will be lowered that doesn’t mean they will necessarily give you a rate cut. Far from it – many credit card companies are actually raising the interest rate on many of their customers.

   Floor rates could prevent some variable-rate cardholders’ APRs from falling, as could lower credit scores. Certain behaviors can trigger a rate increase or lower credit limit, such as paying late, habitually paying the minimum balance or charging close to the card limit. 

   Regardless of what happens, pay attention to your statements and any notices of a change in terms that arrive in the mail. Make sure your issuer hasn’t made an unfavorable adjustment to your APR or credit limit. 

   The latest reports indicate that there is almost triple the default rate on credit card accounts over one year ago. Think about that for a moment – all of those credit card companies and credit issuers will have losses in the billions!

I can’t stress enough though about making sure that your credit scores are healthy and the highest they can possibly be.

The near term is a bit scary with regards to all of this credit mess. You can find more credit repair tips by visiting www.CrushingTheCreditBureaus.com.

Stay Tuned

Mark

What would you do if you received a phone call or letter from your bank that you have been doing business with for years and they suddenly told you that not only had your credit card limits been reduced but now your Home Equity Line of Credit has been frozen…Yikes!

I recently had one of my students called me to share the details of this frantic phone call. Now, several months ago we had worked on her FICO scores and raised them to the high 700′s and one into the low 800′s. I share this with you so that you can see that a credit crunch can happen even to people with high credit scores. That is why it is so important that you arm yourself with the knowledge of how the credit game works and more importantly what to do about it when things change.

With everything that is going on in the economy right now, phone calls like the one above are not surprising. However, I want to share with you her story with you for a couple of reasons;

First off, my student has a problem…she is in-between jobs and was relying on the HELOC to be her nest-egg until she sells one of her real estate properties. Not good right now in this environment.

You see, the time to get, maintain, or increase your credit limits is when you don’t need it – not when you’re in crisis mode.

I was a bit curious as to what caused her bank to call her and freeze the line of credit. It turns out she was 30 days late on her primary mortgage with the bank for the first time ever. Bingo, that is what caused her bank to freak out.

Banks are running scared right now – and for very justifiable reasons. The second that there is any indication that you as a borrower are in the slightest bit of trouble, they immediately take action to “cut their exposure” to you. Is it any wonder though? Just turn on any of the news channels to hear about the latest meltdown or bank takeover.

I think that my student was a bit taken aback by this phone call…listen, when you have the extremely high FICO scores like she has, you tend to think that you are untouchable and that this “credit crisis” is affecting other people. She believed-as most folks do- that her long-term business relationship with her bank was worth something…that her impeccable credit rating made her untouchable, and that her letter perfect payment history would shield her from the woes of Wall Street, Main Street, and every other street.

The hard, cold truth is this; banks, lenders, and credit card institutions don’t give a rip about you or me – they only car about getting paid…period!

Now if you think that just freezing your line of credit or reducing your available credit line is the only thing they can do…think again. How about raising your interest rate? I personally have seen my students get their credit card interest rate doubled or tripled from where it was the month previous.

How scary is that? One month you have a 9.75% APR on your credit card and BLAMO, this month it is increased to 30% because you paid one account late.

Want another example of how screwy things are right now? Ok then-  I was speaking at a Real Estate Investor Summit in Austin with my mentor Bob Leonetti and a gentleman came up to me after my credit presentation and mentioned to me that his bank recently offered him a bribe to close his $300,000 home equity line of credit. They offered him a cash sum on the spot!

This all goes to show you how desperate the banks and the banking system are right now.

So what is the best way to survive the current credit meltdown? 

Make sure that you pay all of your bills on time, no matter what.

I know that I have said it before, but I believe it is worth repeating again. If you have the choice of paying your creditors on time vs. paying for the electric bill…pay the creditor that reports to the credit bureaus first. Now, I know that may seem like strange advice, but you can work out payment arrangements with the electric company. The creditors will report you as 30 days late and then an avalanche of bad things start to take place.

If you pay your bills through “auto pay”, internet billing, or over the phone, make sure that you allow extra time for the payments to post to your account. This will make sure that you don’t get charged late fees, but this will also decrease your chances of receiving “the phone call”  from your banker or creditor wanting to raise your interest rate, lower your credit limit, or freeze your line of credit completely.

*******

There are many strategies, tips, and techniques available on the Internet on how to repair your bad credit. Unfortunately most of them are old, outdated and ineffective!

Having great credit scores is THE most effective way to improve your finances and financial independence. When you build and maintain excellent credit, you control your future.

Discover how to repair bad credit and improve credit scores.

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