The Star-Ledger Archive
COPYRIGHT © The Star-Ledger 2008
Date:
2008/10/01 Wednesday Page: 047 Section: BUSINESS Edition: FINAL Size: 995 words
Series: THE BIG MELTDOWN
Thawing
out frozen credit markets
As lending practices tighten, tips offer ways to get a loan in tough climate
ASK THE BIZ BRAIN
By KARN PRICE MUELLER
FOR THE STAR-LEDGER
All the talk about government bailouts and the credit crunch is worrying
consumers, but many haven't felt it firsthand-yet.
Unless
Congress can agree on a $700 billion bailout package - and maybe even after it does - consumers and small businesses may soon
feel the credit pinch. For some, it may even be a knock-out punch.
The term "frozen credit markets" simply means credit is frozen or very hard to get, even for people
or businesses with terrific credit histories. For consumers, that could mean denials on car loans , the lowering of credit
card spending limits or an inability to get a mortgage or open a home-equity line of credit,
For small businesses, it could be the beginning of the end. Without available credit,
some businesses won't be able to make payroll (which could mean lay-offs), they won't have capital to stock their
shelves and pay their suppliers
"Credit is not
a right. It's a privilege. You need to protect it," Adam Levin , chairman of credit. com and former New Jersey Consumer
Affairs director, said yesterday'. "In good times, It makes your life easier, and in bad times, it could prove to
be your safety net."
Now that the bad times are
upon us, lenders are nervous and they're not as willing to lend as they once were - even to previously approved customers.
You might not feel it yet, but credit-watchers say it's probably only a matter of time. To prepare for the credit crunch's
arrival on Main Street (if it's not here already), the Brain offers these smart credit tips for consumers and small businesses.
* FOR CONSUMERS
Credit cards: If you have credit cards in good standing,
you may not see much change. But if you have a lot of available credit, you could soon see your limits lowered.
Smaller
credit limits can mean trouble. If an emergency comes up, you'll have less credit available (though credit cards should
really only be used as a last resort). And if you have a balance on your card and the credit limit is lowered, you could more
easily overspend and go over the limit. That would trigger pricey fees and penalties.
Auto Loans: Auto loans are
another story. Consumers are already having trouble securing new car financing, and it's further hurting the bottom lines
of carmakers, who are already struggling to sell vehicles.
If you're having trouble getting a car loan and you have equity in
your home, you could use funds from a home-equity line of credit to pay for the car. That, though, can lead to other problems.
(More on that in the next section.)
Home borrowing: Your current mortgage probably won't see a big effect
if you're in good standing. Getting a new mortgage isn't impossible, but it's getting harder.
These
days, you may be asked to put more money down on the property or to pay a higher interest rate as banks try to lower their
lending risk.
Home-equity lines of credit are a different kind of challenge.
Some worried
homeowners are wondering if they should tap their home-equity lines of credit, even if they don't need the money now.
They fear the bank may lower their limit or rescind the credit altogether.
Taking money out now is a
defensive move for consumers, because yes, your bank really could take away your credit line, even if you haven't done
anything to become a greater credit risk. Levin says out of the blue, some institutions may want to review your finances.
Based on the bank's analysis, it could lower your credit limit, maybe because your situation has changed, or maybe because
the bank's lending standards have risen.
If you can afford the interest and the move won't impair your ability
to get other credit instruments, taking from your home-equity line now could be a good move, Levin says.
If
you own a home and you don't have a credit line, you should apply for one now, before lending standards get even tighter,
says Ron Garutti, a certified financial planner with Newroads Financial Group in Clinton. This will be especially helpful
if you lose your job.
Garutti says if you already have a line of credit, consider calling your lender and
asking if they'll increase the limit.
* FOR SMALL BUSINESSES
Small and mid-size
businesses are worried, too. If they can't borrow, they won't be able to run their operations, and everything from
paying salaries to paying for employee health insurance will be at risk.
If you anticipate big expenses
and you're worried about access to funds, talk to your banker, who should be able tell you what you're eligible for
and what kinds of loans will be off the table.
If you already have a line of credit, think hard before you start using
it. If you do not need the money in the foreseeable future, this does not seem wise on the surface, Garutti says.
But
like consumers, if you fear the bank may lower or rescind your credit line, it could be better to use it now, rather than
to need it later and find it's unavailable.
If you don't have an available credit line, it's time to head
to the bank. The sooner you start the process, the better. You may need to present more documentation to be considered for
the loan.
Where you bank may also make a difference. Many smaller banks base their lending decisions on relationships
as much as they consider the finances of a small business.
And if you can, give yourself as many funding sources as possible.
"Make
sure that you are with a stable bank — I like Wells Fargo — and look for multiple options today," Lynch says.
"This may include credit cards, credit lines and home-equity lines."
