Bad Credit Is The Biggest Risk To The Economy
Monday August 27, 2007
The National Association of Business Economy once viewed terrorism as the biggest short-term threat to our economy. Now, it's bad credit. Not gas prices, not inflation, but bad credit.
How has bad credit influenced the market as of late? More and more subprime mortgage-holders are defaulting on their mortgages. This made the subprime market look risky to mortgage investors who subsequently pulled their funding. When investors pulled out, the stock market dropped. The value of the US dollar also dropped, hitting an all-time low against the euro, according to Associated Press.
The good news is NABE doesn't view current credit problems as a long-term threat to the economy. Not because they foresee credit problems being solved, but because the housing market has a strong outlook.
Even if the housing market does turn around, the subprime mortgage fiasco is a sign that consumers need to take control of their credit and start making better decisions about debt.
Just because you get approved for a loan or credit card doesn't mean your budget can handle the extra debt payment. Use your debt-to-income ratio to determine whether you can handle more debt. If the new debt puts your debt-to-income ratio above 37%, you should reduce your current debt load before taking on any new debt.
How has bad credit influenced the market as of late? More and more subprime mortgage-holders are defaulting on their mortgages. This made the subprime market look risky to mortgage investors who subsequently pulled their funding. When investors pulled out, the stock market dropped. The value of the US dollar also dropped, hitting an all-time low against the euro, according to Associated Press.
The good news is NABE doesn't view current credit problems as a long-term threat to the economy. Not because they foresee credit problems being solved, but because the housing market has a strong outlook.
Even if the housing market does turn around, the subprime mortgage fiasco is a sign that consumers need to take control of their credit and start making better decisions about debt.
Just because you get approved for a loan or credit card doesn't mean your budget can handle the extra debt payment. Use your debt-to-income ratio to determine whether you can handle more debt. If the new debt puts your debt-to-income ratio above 37%, you should reduce your current debt load before taking on any new debt.
Comments
So what happens to the credit scores of those people who have to walk away from their homes? Do their credit card rates automatically increase? Will they end up paying as much in extra fees (or fines) on credit cards or other debt as they would on their house payment?
Continuing to pay credit card debit is not the least of those worries. They will (1) have to find a new place to live (security deposit + first month’s rent + moving expenses, etc.) (2) continue to pay their credit cards, (3) PLUS pay the difference in the money received for the house from the foreclosure (which could be substantial), and (4) IF the balance–on the house or the credit cards–is forgiven, then the forgiven amount has to be reported to the IRS as taxable income.
Is this a great country or what?
Most bad credit is the fault of loose practices by Credit Card companies that give credit to people that cannot handle it. Then when people are overloaded that do not know how to handle credit the credit card companies pile on more fees and late charges! Credit Card companies should be held accountable for their practices also!