Consumer Debt Declining

Low credit scores and the difficulty of qualifying for loans may be the cause, since lenders have tightened requirements in the face of massive losses.

Buying a home now calls for a score of 720, and the best rates – now at 5.1% on average – now go to those with a score of 760 or more. Even buying a car requires a good score – with 720 being the ticket to low interest financing on a new car.

With the national average score hovering around 680, most prospective borrowers have some work to do before qualifying.

Or, it could be that consumers have voluntarily changed their spending habits.

Whatever the reason, new figures from the Federal Reserve show that consumers reduced their borrowing by a record $7.94 billion during the month of November. This is the largest dollar-amount drop in the history of record-keeping. It’s also the largest percentage drop since January 1998.

Revolving debt, which includes credit cards, dropped by $2.8 billion while other debt, such as automobile loans, dropped by $5.2 billion. Economist Ken Mayland is quoted as predicting that this reduction will continue well into 2009.

Economists and financial consultants have been advising consumers to cut back on spending for several months – while the government has been urging spending as a way to bolster the sagging economy. In fact, when the stimulus checks were mailed in 2008, welfare recipients were told that they must either “Spend it or lose it.”

And yet, millions of consumers either cannot or will not take on more debt.

Meanwhile, bargains abound for both home buyers and car buyers. The glut of foreclosed properties and short sales has forced prices downward. It’s also swollen the number of homes for sale to a point where many areas have at least a 24 month inventory. (This is determined by dividing the number of homes for sale by the number sold, on average, per month.)

Mortgage lenders lose money every month those “REO” homes are held in inventory, so prices will continue to drop.

Car dealers are also offering bargains, especially on their least popular models. A borrower with a high credit score can get a 0% 36-month loan on some cars, and rates as low as 2.99% on others.

If you’re considering joining the ranks of buyers taking advantage of these bargains, check your credit report and scores before you go shopping. If your scores aren’t quite where they need to be for the best rates, take steps to raise them.

Don’t assume that your scores are fine just because you don’t owe much and you pay all your bills on time. A variety of factors, including data entry errors, can affect your score. Industry experts estimate that approximately 25% of all credit reports contain some kind of error – and many of those are errors that can lower your score.

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