Per the “Wall Street Journal,” headline today, “Bank Lending Keeps Dropping.” 

Big surprise. 

As I’ve said in previous posts, lending guidelines are getting more stringent.  How are banks going to lend more money if it’s tougher to borrower?  The irony is that this is so simple, yet, the smartest economist in the world are missing this simple point.

“The Wall Street Journal” published an article today how foreclosures will start ramping up because the temporary moratorium (on foreclosures) is over.  Over the next few months the number of foreclosures will increase tremendously, because people will be unable to pay their bills.   

If this is you, do not let this be the end of your credit. 

People think, because they have a foreclosure, their credit will be impacted forever.  This is NOT true.

7 Steps to a 720 Credit Score is designed to get people with a foreclosure on their credit to a credit score of 720, four to five years sooner than letting the foreclosure fall off your credit report.    You are going to be judged by your credit score whether you like it or not.  The foreclosure will have a significant impact; however, it doesn’t have to have a significant impact for long.

I guess it’s fair, after all, it’s their company… no wait, it’s us, the taxpayer who saved them.  So after the bank accepted billions and billions of dollars in taxpayer stimulus, they have decided that credit card interest rates are too low, even though rates are much lower.  That makes sense. 

Not only are they cutting our credit limits (previous posts), which impact our credit score, but also are raising our rates, which is going to impact how much we can pay, which will also impact our credit score.

Bottom Line:  If you get a notice of a your credit card raising its interest rate; call the bank and agree not to charge any more on the credit card, and they will keep your previous rate.  Per my book, 7 Steps to a 720 Credit Score, make sure that your balance is under 30%, so your credit score won’t be negatively impacted.

The Los Angeles Times published an article today about the UN’s Security Council split response about North Korea testing the rocket.  Big Surprise.

Since when do we expect the UN to actually give a firm demand?  They are master hedgers. It reminds me of our credit bureaus.  It reminds me of our banks.  It reminds me of the credit card companies.  

It’s very clear that North Korea acted unfairly by breaking the rules that they agreed to.  Isn’t it equally unfair that our credit reporting system impacts 80% of Americans with errors and that those American lives are being impacted because of those errors?The UN will not take action, just like our government has not taken action.  The only difference is that the credit reporting system can be fixed via education.  North Korea… well, it’s a little more difficult to negotiate with tyranny. 

The Wall Street Journal published an article today about why banks started lending to small businesses even though “on paper” their financial statement didn’t look like they could pay back the loan.  A 1995 study by Fair Isaac Corp. and Robert Morris Associates, found that a small business cash flow and financial statement had little correlation with how the owner would pay his bills.   “A stronger prediction was the business owner’s personal credit score,” says the article.    Now the year is 2009 and credit is tight.  If your credit score was important 5, 10, and 15 years ago, today it’s absolutely critical.    Per the small print on the agreements with your credit card companies, they can run credit checks anytime to make sure your on time on other bills. If your not, be prepared to have your interest rates raised or your credit limit dropped.

According to USA Today, 11% of US Consumers (about 22 million people) had their credit card limits cut, even though they pay their bills on time and have good credit. For many small business owners, this can be a big problem as they use their credit cards to help keep their business running.  If you don’t want your lenders to cut your limit, it’s very important that you do not change your spending habits.  Meaning, if you typically pay your bills in full each month, then do your best to continue to pay them in full each month.  If you typically pay 50% of your bill each month, then do your best to continue to pay at least 50%.  Banks are looking for changes that will show “financial hardship,” and many times they will jump to conclusions.

There is an article in the Wall Street Journal today how home prices have dropped just under 30% in the 10 biggest cites in America.   At the same time, we’re getting reports from the National Association of Realtors how “sales are going up and that this is the time to buy.”

 Here is the disconnect:  the lending guidelines and credit scoring requirements continue to go up and there is no education about the guidelines or credit scoring.   People think if you pay your bills on time, you’re going to have perfect credit, which is WRONG.   So until more people can qualify by teaching individuals that paying your bills on time is not necessarily going to guarantee you a perfect credit score… there is going to continue to be disconnect, which will impact how significantly the real estate market can recover.

This weekend I had a conversation with well educated attorney, probably around 65 years old, she asked me, “How are you doing in this economy?  What do you do?”    I responded, “I’m in education and finance; we sell products on saving money and specifically, how to raise your credit score to reduce your monthly payments.”  She said, “Oh yeah, I understand all about credit.  That is one problem I don’t have to deal with.”    She continued by saying, “I only have one American Express card and that’s all I use.”  I said, “Well statistically speaking, if you have one credit card it’s going to hurt your credit score.”  She said, “I do know that, in fact, I had 11 cards, and I closed them all down.”  My response, “Well, statistically speaking when you close down your accounts it will hurt your credit score.”    She said, “I did know that, but it’s not a problem for me because I don’t need credit.”  From there, I let the conversation die.  The bottom line, I hear this every single day. Every day, I hear that, “I’m different.”  In reality, if you are living in America, we are all the same when it comes to your credit score.  Even though this woman thinks she “doesn’t need credit,” she does and let me explain.  Does she have car insurance?  Yes, and that could be impacted because of your credit score.  Does she have a mortgage?  Most likely, and that WILL be impacted by her credit score. Does she have kids?  Yes, she had three of them.  Most likely, her kids don’t have her resources and if she is teaching her kids this information; they are starting down the wrong path.  This woman thinks that she doesn’t have problems, just like the 100M Americans who don’t think they have a problem.

I’m hearing over and over, “the economy is recovering, the economy is recovering!”  Ben Bernanke said last week that he expects our recovery to come this year and of course our politicians are saying its “right around the corner.”   Let me ask you a question:  In your world, who is spending more money today than they were a year ago?  This is the fundamental problem that we are faced with.  70% of our economy is based on people buying things.  For our economy to recover, the government needs people to buy bigger cars, changing their IPods, new homes, etc. etc., thus the lower rates and rebate checks from the government.   The problem is that spending money got us into this problem, and the government wants us to spend more to get us out of the problem… BUT… nobody is spending!  In my world, conversation after conversation is about saving more, not spending more.     Are we really going to get out of the woods this way?

Yesterday I got a call a money manager from Canada.  He said, “I’m so excited that the market’s turning!  Inventory of real estate is coming down and banks are lending more!  It’s going to be great!”   I hate to be the downer here… but there is one thing that everyone is missing:  lending guidelines are tougher than they have been for over a decade AND they continue to get tougher.  If the guidelines don’t loosen, then there’s no way we’re going to have a recovery like everyone thinks is coming.  Last week a lady called me for a loan for $300,000 loan.  Her property is worth $2M.  That’s a 15% loan to value, meaning there is only a loan on 15% of her home.  She’s been in the property for the last 12 years, has $75,000 in the bank, has never been late on her payments, and her credit score is over 720.   Per Fannie Mae/ Freddie Mac’s current lending guidelines, she can’t qualify for a $300,000 loan.  Why?  Because her income goes up and down (she’s an actress).  Do you see the problem here?  When someone who has lived in a property for 12 years, has great credit, never missed a payment, has $75,000 in the bank (equivalent of 3.9 years of payment), and they can’t get a loan, I think our lending guidelines need to soften before we’re going to see a recovery.