Have we gone too far with new credit score standards?
Americans – particularly minorities – find it hard to move forward between tough regulations and too much debt.
When the housing crisis occurred and the government stepped in to impose tougher regulations on the mortgage industry, the intent was to help prevent predatory lenders from taking advantage of high-risk consumers. After all, at least part of the real estate market collapse came about because consumers on shaky financial ground were sold adjustable-rate loans that they couldn’t possibly afford to pay back once the economy shifted.
In that light, regulation seemed like the right thing to do – and it’s severed its purpose in helping to ensure only people who can afford to take out loans can get approved. Unfortunately, at the same time, the new standards have cut many consumers out of the market completely.
Even Federal Reserve Chair Janet Yellen admits, “It is difficult for any homeowner who doesn’t have pristine credit these days to get a mortgage.”
Pastors Mark Whitlock and Sam Rodriguez believe that’s putting it lightly – particularly for minorities in their communities. “Over the last six years, more than half of all Black and Latino wealth has been lost because of the housing crisis. As a result, few Black and Latino families have less than perfect credit.”
Stuck in credit score limbo
All of this means potential homebuyers are stuck in a Catch 22. Lack of regulation led consumers to take out mortgages that are now upside down that they can’t afford to pay. Those missed payments caused a real hit to consumers’ credit scores, so consumers can’t qualify for good loans available in the now-equalized housing market.
The situation is made even worse when you add in problems with credit card debt and student loan debt. The pastors point out, “The credit scores of many well-educated Black and Latino millennials have been or will be impacted by student loan burdens that often exceed $100,000.”
Credit damage triple whammy
So in theory, as a consumer trying to get ahead:
- You took out an ARM on a home so you could get into housing market and built equity, only to have the equity rug pulled out from under you.
- You took out student loans to advance your career so you could reach a better pay grade, but now you aren’t bringing in enough income to cover you payments.
- On top of that, when things got tight, you relied on credit cards to cover shortfalls in your budget and may have even fallen into the payday loan trap.
“All of these lending options and credit tools that were supposed to help consumers get ahead have really ended up holding them back,” says Gary Herman, President of Consolidated Credit, “and unfortunately, it’s really up to consumers to regain control so they can borrow effectively in today’s more regulated market.”
How to get ahead… and stay ahead
Consolidated Credit offers these tips to help consumers achieve the credit score necessary to borrow in the face of tougher regulations:
- If your mortgage is upside down (you owe more than your home is actually worth) and you haven’t taken advantage of refinancing options under relief programs like HARP, talk to a HUD-approved housing counselor to see if you could refi to lower your payments.
- For federal student loans, you can look into options for student loan consolidation. This will lower your monthly payments and can make you eligible for loan forgiveness if you work in public service.
- You should also consolidate your credit card debts and other unsecured debts. With a debt management program, you can even roll in debts like unpaid medical bills and some payday loans, so you get one low payment for all of your debts.
The good news: Even with consolidated and refinanced debt, the payments you make “count” towards helping you build a better credit score. So you can consolidate and use refinancing options to lower your payments, then use those payments to help you build your way back to a good credit score.