Where was your credit in the spring of 2008? For many people it was teetering on the edge of solvency, about to plummet into the deep hole known as the Great Recession. By the end of the following year, 2009, mortgage delinquencies would climb to almost 7%, according to data by TransUnion. Credit card late payments also climbed, according to Federal Reserve data, and would peak at 6.78% in the third quarter of 2009.
If you were among those sucked into the collapsing bubble of the housing market or whose incomes took a beating in the soon-to-be tumultuous job market, your credit probably did not ride out the recession unscathed. Instead, you may have lost your home to a short sale or foreclosure, or were forced to negotiate settlements on some of the credit cards you couldn’t pay back. Maybe you even filed for bankruptcy.
Whatever damage was done, it’s now been seven years since the recession began and consumers (and lenders) are cautiously breathing sighs of relief. Delinquency rates on mortgages and car loans are at “normal” levels. New TransUnion data reveals that the mortgage delinquency rate (the rate of borrowers 60 days or more delinquent on their mortgages) declined for the 12th straight quarter to 3.29% at the end of the fourth quarter 2014.
At the personal level, negative items such as charge-offs due to unpaid credit cards are beginning to “age off” credit reports. That means some of those hardest hit by the downturn may see their credit scores improve over the next couple of years simply because negative information becomes too old to be reported. Time can sometimes be the best credit repair solution.
While the recovery is certainly not complete for everyone, for those who are starting to see their credit scores improve, the question is, “What now?” What can you do once your credit starts to recover? Here are five suggestions.
1. Refinance Your Home — or Buy One
There were three main reasons it became tough to get or refinance a mortgage after the recession: Home values had dropped in many parts of the country, credit and credit score requirements got tighter, and many people had been laid off from their jobs or taken pay cuts.
But the rate of homes underwater is steadily improving (down from a peak of 21% to 16.9% and dropping in the third quarter of 2014, according to Zillow). And in the meantime, its’ become easier to get a mortgage. Plus more people are back to work, albeit some at lower pay.
Taken together, these factors mean that 2015 could be a good year to get or refinance a mortgage. Interest rates are still low and in many parts of the country, homes are still affordable. If you haven’t shopped for a mortgage in the past year or so, now may be a good time.
2. Trade In Your Clunker
If you’ve been trying to eke a few more miles out of your car or truck before it dies, it may be time to consider replacing it. Interest rates on vehicle loans are low on average, and even dealer financing can be very attractive as automakers compete to sell their inventory. That doesn’t mean you should throw caution to the wind and go for the best car you can afford, though. Auto loan terms are getting longer — 67.2 months on average, according to Edmunds.com — and with an average vehicle price just over $32,000, that can mean significant debt for many families. But if you can negotiate a good deal on a car or truck, finance it at a low interest rate for a reasonable period of time (48 months or less is ideal), then keep it in good condition, you can come out ahead.
3. Negotiate a Better Deal on Your Credit Card
Pre-recession, the advice about credit card rates was almost always the same: Don’t be afraid to call your card issuer to ask for a lower rate. “It can’t hurt,” experts would say (myself included). But as more and more cardholders started falling behind on their payments, issuers became more cautious. Some raised cardholders’ interest rates, others cut credit limits — and some did both. Consumers who called to complain about a credit card rate that was too expensive sometimes had their limits slashed or accounts closed, especially if they mentioned that they were experiencing financial difficulties.
But most people are paying their credit cards on time these days, and issuers are back to courting cardholders and making deals, especially for those who carry balances or who charge large amounts each month. So if the cards you are carrying balances on have high rates but your credit scores have improved, don’t be afraid to see if your issuer can offer you a better deal. If not, a balance transfer may be another option for cutting your interest rates (the best balance transfer credit cards have attractive offers).
4. Consolidate Your Debt
If you are still paying off balances on credit cards you ran up several years ago, a consolidation loan may help you finally get those paid off. With a personal debt consolidation loan, you can often get a loan with a fixed interest rate and specific repayment period. Consolidating this way gets you off the minimum-payment treadmill and allows you to work toward a debt-free date in the not-so-distant future. And consolidation loans have become much more widely available post-recession, thanks in large part to the peer-to-peer lenders that offer them.
Home equity loans are also becoming more popular again thanks to rising home values, but all things being equal, an unsecured loan (like a personal loan) is often a safer bet in the long run when compared to a loan against your home.
5. Get Your Secured Card Deposit Back
Did you open a secured credit card to rebuild your credit after it went south? If so, it may be time to move on to an unsecured card and get your deposit back. A few secured cards offer a “graduation” feature where you can get your secured account upgraded to an unsecured one. But in many cases, you will need to get a new credit card then close out the old one.
While keeping accounts open as long as possible is often a good strategy as far as your credit scores are concerned, there are times when closing them make sense, and this is one of them. As long as you haven’t defaulted on payments on your secured card, you should be able to close your account and have your deposit returned.
Remember, with all these options, it takes good credit to qualify for the lowest interest rates and best deals. So before you start shopping, review your credit. Get your free annual credit reports, and get an idea of how lenders view your information by checking your credit scores. You can get two free credit scores updated monthly on Credit.com.)
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