We had that thread a couple weeks ago about credit cards. I was reading this New York Times article about the unfolding credit card mess. I think most ETS readers are pretty responsible with their credit cards, so I was struck by one aspect of this mess that I hadn't thought of--lower personal credit ratings.

One part of the formulas various rating agencies use to calculate your credit rating is how much of your credit line you are actually borrowing against. However, banks have been unilaterally lowering the credit lines of many people or even cutting off some credit, like home equity lines of credit, even though they haven't missed any payments, lost a job, or done anything "bad". So, even if you faithfully pay off the balance every month, your average balance is going to be a larger percentage of your available credit if your bank lowers your limit or closes a line of credit, therefore your credit score could go down. That could make it harder to borrow or lead to higher interest rates to borrow for a car, a student loan, a mortgage, etc.

Which is why my policy for the past few years is to rely as little as possible on credit.

Really, credit is a crutch. We as a society have been relying on it far too heavily. I believe it is a far better thing for most folks to learn to get by on what they have, which includes buying a house, paying for an education, buying a car, a boat, a plane, etc.

The less you have to use it, the less it will affect you. Couldn't afford to own a house otherwise you say? Well, tell that to the how many thousands of folks that have gone/are going through foreclosure today. Of course, those of us who were smart enough not to bite the rotten carrot of an ARM to finance a house purchase we couldn't otherwise afford now also get to pay the price for those who relied on credit rather than good sense. Might as well have taken those loans to the horse track for all the good it did us.

There's dozens of ways to slice the finance calcs and credit ratings, but no matter how you slice it, it's almost always ends up as one man living at the expense of another.

It all reminds me of Wimpy's motto, "I will gladly pay you Tuesday for a hamburger today."

Ah the days before Subprime, Structured Investment Vehicles SIVs, Derivatives and Credit Cards (or would that be Debt cards),

http://uk.youtube.com/watch?v=ysCNXBbLC-U

http://uk.youtube.com/watch?v=Kc_iWPnjtCI - When borrowing a few shillings was poetry itself.

The society we live in works on credit, the biggest part of the current financial crisis is banks that are afraid to lend to one another. It's not that they don't have money, they're just afraid to lend it.

Shopping for a car doesn't lower your credit rating nor does checking your rating on a regular basis. Opening a lot of lines of credit will lower your credit rating.

If anyone is afraid of having their credit score lowered by shopping, don't give the dealer any personal information until after you've made up your mind which car and which dealer you want to use.

Given that virtually all businesses, large and small use credit every day, how can we expect individuals to not use it too? It's simply woven into our everyday lives. Credit isn't the problem, people are the problem.

As for credit lines being lowered and cancelled, that's just the fear being transmitted downwards. We have to remember that to creditors, being responsible means they don't make as much money. People who pay off their credit card bills regularly are referred to as "deadbeats" in the credit card business. Ironically enough, in the midst of all this craziness, I've had interest rates lowered, credit lines increased and offers for more cards coming in thru the mail slot with ever increasing frequency. My girlfriend has had her line of credit increased without being asked several times recently. We can proudly go into even deeper debt at a moment's notice...;^)

John E

It seems ironic that the lending institutions are the ones who are guilty of poor management of their resources yet it is the diligent consumer/borrower whose credit rating/limit is being lowered indiscriminately while bailing out the lenders.

Actually Benjammin, YMMV.

We closed on a new home three years ago this week, as well as vacant wooded lot that we intended to build a large custom home on just down the street. Despite the fact that interest rates were at near historic lows this time three years ago, I nevertheless chose a three year ARM (fixed for the first three years, then adjustable annually each October) for the simple fact that we originally intended to have our custom home completed (and this home sold) prior to the rate adjustment, so I figured it would be nice to save with the lower monthly payments that the ARM provided.

Situations change, and for the foreseeable future my wife and I plan to stay in the house we're in now, and continue to defer construction on the new home until some later time. I received formal notice from the mortgage holder earlier this month that the interest rate adjustment on our variable rate mortgage has actually dropped from 5.50% to 5.25%

Based upon the best fixed rate mortgage that was available back when we closed this time in 2005, the ARM has saved us close to $10k in interest. With the recent 1/4 point drop, we'll save an additional $4k or so this year alone (over the fixed rate offered three years ago) with the intention of refinancing to a fixed rate mortgage sometime next summer (unless of course rates continue to drop significantly).

Jim

Jim, that wasn't good planning, it was just dumb luck.

Sue

Glad it's working out for Jim. But what about the million others who rolled the dice and lost? Who picks up the tab for their risk? Folks like Benjammin suggests: folks who tightened their belts and passed up the ARM gamble.

Anyway, I guess we'll all be bailing. Problem is, someone keeps punching more holes in my bailing bucket.

You need lots of debt so you can get a high credit score which you need because it allows you to... get more debt. How is that a good thing?

Next thing they'll be telling us we need to pay lots of mortgage interest so we can deduct it on our taxes. Right, send $10,000 to the bank to save $1,500 in taxes. Even I don't hate taxes that much.

Perhaps you really mean "Don't fill out credit applications at multiple dealerships?"

Pay cash. It drives them crazy.

All this consumer credit behavior is people agreeing to be sharecroppers. They work while the CC company gets a share of the harvest.