What to Expect for Your Credit in '09
"On the Money" Contributor
2009 is sure to be a watershed year for how we make, spend and save our money. Particularly, the world of credit is in for a major shake-up. Here's what I expect in the new year:
1. More consumer credit lawsuits. Because of adverse actions taken by lenders to lower credit limits and close the credit card accounts, millions of consumers now have lower credit scores and don't understand why. We're predicting consumer's who have done nothing wrong and class action attorneys will take a very dim view on the credit card industry's attempts at mitigating their risk by modifying terms of their customer's accounts.
2. A rush to join credit unions. Little or no exposure to subprime mortgages, no shareholders to impress every three months and plenty of money to lend seems like the tri-fecta to me. Add to that the same level of insurance for your deposits and overall better treatment of their members compared to that of the large banks and this is a slam dunk. As I've said on more than on occasion, you're nothing but a number. 2009 sees consumers growing tired of that moniker and flock to credit unions where they truly are more than three digits and a credit report.
3. Sweeping credit card reform and early adoption. A new set of credit card rules was approved on December 18th by the Office of Thrift Supervision, the National Credit Union Administration, and the Federal Reserve. The new rules mean many more protections for consumers that include longer grace periods, fewer fees and no more Universal Default. The rules take effect in July 2010 but you should expect early adoption in 2009 by many of the 16,000 credit card issuers.
4. A new credit usage paradigm. This is the silver lining of the credit meltdown. Millions of credit users, both young and old, will recognize that credit is a privilege, not a right. They will use this credit disaster as motivation to learn more responsible methods of credit management. Paying 24% interest on credit cards and car loans is just flat out punishing. Many will see the light ... and just in the nick of time.
5. FTC smackdown part II. Credit repair organizations felt the sting of the Federal Trade Commission in 2008. 2009 it's the debt settlement industry's turn to learn what it means to have "ill gotten gains." Too many bad apples in this space overshadow any company who legitimately tries to follow ethical business practices. In lieu of the smackdown we may see new regulations governing how these companies do business and how much they can charge.
6. AnnualCreditReport.com will be busier in 2009 than any year except for 2005, when the free credit report laws rolled out nationally from West coast to East. Consumers who don't claim their Federally mandated free credit reports have been hiding in a cave for the past six months.
7. Academia to the rescue. Thankfully we'll see more institutions of higher ed run with the financial responsibility torch. Already schools like the University of Georgia and professors like Dr. Brenda Cude are introducing some of their seniors to consumer credit education that does more than just explain what interest rates are. Thumbs up also goes to Counselor Alicia Davis and The Westminster Schools in Atlanta for doing the same for their high school seniors.
8. Credit Repair Organizations Act ... a rewriting. If this doesn't happen it will be a crying shame. The law is too broadly written and prevents legitimate organizations such as the credit bureaus, Fair Isaac and boutique cred-ucators to subsidize the cost of education. When the credit bureaus and Fair Isaac have to settle lawsuits accusing them of being credit repair organizations then you know something is wrong.
9. More people depending on payday lenders. These guys get a lot of bad press but I've never seen an industry do a better job educating consumers why you SHOULDN'T use their services. A payday loan is a low dollar loan meant to be paid back in short order, a few weeks in some cases. You give them access to your checking accounts so they're gonna get paid back. As more people find it impossible to get loans with mainstream lenders the next step on the way toward Tony Soprano type lenders are the payday guys.
10. Some lender will develop amnesia and begin offering high LTV loans again. LTV stands for "Loan to Value" and it's a common term used in mortgage lending that represents the ratio of the amount borrowed to the appraised value of the home. In the past, mortgage lenders let consumers borrow more than their house was worth. So, you could actually have an "LTV" above 100%. And some really aggressive lenders would even go to 125% LTV. This was considered an acceptable risk because home values had always gone up. Those high LTV loans are next to impossible to find right now but, unlike the saber-toothed tiger, you can expect a comeback in late 2009.
John Ulzheimer is a nationally recognized credit expert, president of Consumer Education for Credit.com and contributor to On The Money. Learn more about him here.