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Ulzheimer: The Future of Consumer Credit

John Ulzheimer is a nationally recognized credit expert and contributor to On the Money. Learn more at Credit.com or JohnUlzheimer.com.

How many of you watched President Bush address the nation last week? He did a good job explaining in layman’s terms some of the major reasons why we are in our current situation. He also made numerous references to the credit and lending environment. In fact, I counted 18 such references before I stopped. And while it’s difficult to predict exactly what this bailout will mean to you and the credit world, I’ll give it a rip.

One of the most common questions we’re getting at Credit.com is: “How can I get credit in this environment?”

Normally that’s a fairly easy question to answer…pay your bills on time, keep credit card debt to a minimum, don’t shop excessively for credit…all the things you need to do to maintain good credit scores. I would suggest, however, that not only do you need to concern yourself about getting credit today but more so about how you’ll get credit starting in about 3 to 6 months and over the next several years.

Source: Credit.com
Source: Credit.com

Roughly 24 months ago you could have gotten a credit card or car loan with a FICO score of roughly 620, and 580 for a mortgage. Just to illustrate how easy it was to get a home loan, a full 83% of the U.S population had scores higher than 580. That means as long as the income and collateral requirements were met (or ignored) your scores would qualify you for a home loan.

Today to get the best deal on a mortgage loan you’re looking at a score closer to 750, even 780 in some cases. To illustrate how difficult it is to qualify today for that best rate on a home loan, a full 17% of the U.S population has scores higher than 780. That means that even if you meet the newly important income and collateral requirements you might qualify for a home loan.

Surely after “troubled assets” are removed from a bank’s book of business and they’re free to “resume the flow of credit to families” banks will revisit their underwriting criteria. The new underwriting model will surely include a renewed attention to minimum credit scoring requirements. As a matter of fact, if the bailout doesn’t significantly change how lenders evaluate your credit risk then they’ve been camping out in a cave for the past 24 months.

I’m not saying that people with bad credit won’t or shouldn’t qualify for loans. What I am saying is that for the first time in a very long time a huge percentage of our population will learn the hard way what I’ve been trying to convince them of for 17 years -- that credit isn’t a right, it’s a privilege.