How a Recession Can Affect Your Credit Application

Loans are harder to secure when the economy is slow, making a good credit application more important in a recession. The right credit application should take into account the factors of the economy at large. The application should show why the applicant is a good candidate either despite or because of these factors. Borrowers who make the mistake of ignoring the economy will not achieve the financing they are seeking.

Less Loans Available

The first factor to understand when seeking a credit line in a recession is how the larger markets affect each consumer's ability to get credit. Businesses, families and even government agencies all rely on debt to carry out a normal business cycle. They take loans in order to achieve future profits, and then they pay off the loans with those profits. When they fail to make a profit, they cannot pay off the loans. This means lenders like banks and credit card companies don't get paid. When they don't get paid, they cannot pay the next borrower. Ultimately, there will be fewer loans to go around. Each borrower must have a better credit application than the next person in order to secure the limited credit available. 

Lower Appetite for Risk

Banks and lenders start avoiding risky loans when other loans default. People with poor credit will get turned away much faster in a recession then they do in an economic boom. Even loans that are usually considered stable turn much riskier in a recession. For example, credit cards are typically a profitable option for a lender. The limits are fairly low, limiting exposure to risk; further, the interest rates are usually adjustable, allowing the lender to respond immediately to changes in the economy or the borrower's credit. In a recession, though, more people start using credit cards for household purchases instead of just luxury goods and run up large balances. Your application will have to show that you utilize a very low percentage of the total credit you have available to show a lender you are responsible with this.

Lower Limits

To control spending, credit card companies and lenders start lowering limits. If you are seeking a credit line increase in a recession, you should be prepared to hear "no." In order to improve your application and get more credit, you will need to show your financial strength has increased despite the bad economy. If you have paid of a mortgage or received a large raise, you may have a case that you deserve a limit increase. On the other hand, if you have lost your job or gone further into other debt, you may see your limits decrease.

Change in Interest Rates 

In a recession, the national interest rate tends to go down to curb inflation and encourage borrowing. While it would be logical to expect lower interest rates across the board as a result, some lenders actually raise rates in order to bring in more money when they're business is hurting. Credit card rates are usually the first to adjust. Anyone in an adjustable-rate mortgage should be concerned as well. When you are applying for new credit, be prepared to meet difficult minimum credit score requirements to achieve low interest rates. 

 


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