How to Get Approved for Credit in a Financial Downturn

In a recession it’s common for many people to rely on credit cards and loans to balance their finances. It’s the ultimate catch-22 since, during a recession, these financial products can be even harder to qualify for.

This holds true, according to historical data from the Federal Reserve Bank of St. Louis. It found that during the 2007 recession, loan growth at traditional banks decreased and remained deflated over the next four years. 

Credit can be a powerful tool to help you make ends meet and keep moving forward financially. Here’s what you can do if you’re struggling to access credit during a weak economy.

Lending becomes riskier in a weak economy. Does this mean you’re completely out of luck if you have bad credit? Not necessarily, but you might need to take the time to understand all of your alternatives.

How Does a Financial Downturn Affect Lending?

Giving someone a loan or approving them for a credit card carries a certain amount of risk for a lender. After all, there’s a chance you could stop making payments and the lender could lose all the funds you borrowed, especially with unsecured loans. 

For lenders, this concept is called, “delinquency”. They’re constantly trying to get their delinquency rate lower; in a booming economy, the delinquency rate at commercial banks is usually under 2%. 

Lending becomes riskier in a weak economy. There are all sorts of reasons a person might stop paying their loan or credit card bills. You might lose your job, or unexpected medical bills might demand more of your budget. Because lenders know the chances of anyone becoming delinquent are much higher in a weak economy, they tend to restrict their lending criteria so they’re only serving the lowest-risk borrowers. That can leave people with poor credit in a tough financial position.

Before approving you for a loan, lenders typically look at criteria such as:

  • Income stability 
  • Debt-to-income ratio
  • Credit score
  • Co-signers, if applicable
  • Down payment size (for loans, like a mortgage)

Does this mean you’re completely out of luck if you have bad credit? Not necessarily, but you might need to take the time to understand all of your alternatives.

5 Ways to Help Get Your Credit Application Approved 

Although every lender has different approval criteria, these strategies speak to typical commonalities across most lenders.

1. Pay Off Debt 

Paying off some of your debt might feel bold, but it can be helpful when it comes to an application for credit. Repaying your debt reduces your debt-to-income ratio, typically an important metric lenders look at for loans such as a mortgage. Also, paying off debt could help improve your credit utilization ratio, which is a measure of how much available credit you’re currently using right now. If you’re using most of the credit that’s available to you, that could indicate you don’t have enough cash on hand. 

Not sure what debt-to-income ratio to aim for? The Consumer Financial Protection Bureau suggests keeping yours no higher than 43%. 

2. Find a Cosigner

For those with poor credit, a trusted cosigner can make the difference between getting approved for credit or starting back at square one. 

When someone cosigns for your loan they’ll need to provide information on their income, employment and credit score — as if they were applying for the loan on their own. Ideally, their credit score and income should be higher than yours. This gives your lender enough confidence to write the loan knowing that, if you can’t make your payments, your cosigner is liable for the bill. 

Since your cosigner is legally responsible for your debt, their credit is negatively impacted if you stop making payments. For this reason, many people are wary of cosigning.

In a recession, it might be difficult to find someone with enough financial stability to cosign for you. If you go this route, have a candid conversation with your prospective cosigner in advance about expectations in the worst-case scenario. 

3. Raise Your Credit Score 

If your credit score just isn’t high enough to qualify for conventional credit you could take some time to focus on improving it. Raising your credit score might sound daunting, but it’s definitely possible. 

Here are some strategies you can pursue:

  • Report your rent payments. Rent payments aren’t typically included as part of the equation when calculating your credit score, but they can be. Some companies, like Rental Kharma, will report your timely rent payments to credit reporting agencies. Showing a history of positive payment can help improve your credit score. 
  • Make sure your credit report is updated. It’s not uncommon for your credit report to have mistakes in it that can artificially deflate your credit score. Request a free copy of your credit report every year, which you can do online through Experian Free Credit Report. If you find inaccuracies, disputing them could help improve your credit score. 
  • Bring all of your payments current. If you’ve fallen behind on any payments, bringing everything current is an important part of improving your credit score. If your lender or credit card company is reporting late payments a long history of this can damage your credit score. When possible speak to your creditor to work out a solution, before you anticipate being late on a payment.
  • Use a credit repair agency. If tackling your credit score is overwhelming you could opt to work with a reputable credit repair agency to help you get back on track. Be sure to compare credit repair agencies before moving forward with one. Companies that offer a free consultation and have a strong track record are ideal to work with.

Raising your credit isn’t an immediate solution — it’s not going to help you get a loan or qualify for a credit card tomorrow. However, making these changes now can start to add up over time. 

4. Find an Online Lender or Credit Union

Although traditional banks can be strict with their lending policies, some smaller lenders or credit unions offer some flexibility. For example, credit unions are authorized to provide Payday Loan Alternatives (PALs). These are small-dollar, short-term loans available to borrowers who’ve been a member of qualifying credit unions for at least a month.

Some online lenders might also have more relaxed criteria for writing loans in a weak economy. However, you should remember that if you have bad credit you’re likely considered a riskier applicant, which means a higher interest rate. Before signing for a line of credit, compare several lenders on the basis of your quoted APR — which includes any fees like an origination fee, your loan’s term, and any additional fees, such as late fees. 

5. Increase Your Down Payment

If you’re trying to apply for a mortgage or auto loan, increasing your down payment could help if you’re having a tough time getting approved. 

When you increase your down payment, you essentially decrease the size of your loan, and lower the lender’s risk. If you don’t have enough cash on hand to increase your down payment, this might mean opting for a less expensive car or home so that the lump sum down payment that you have covers a greater proportion of the purchase cost. 

Loans vs. Credit Cards: Differences in Credit Approval

Not all types of credit are created equal. Personal loans are considered installment credit and are repaid in fixed payments over a set period of time. Credit cards are considered revolving credit, you can keep borrowing to your approved limit as long as you make your minimum payments. 

When it comes to credit approvals, one benefit loans have over credit cards is that you might be able to get a secured loan. A secured loan means the lender has some piece of collateral they can recover from you should you stop making payments. 

The collateral could be your home, car or other valuable asset, like jewelry or equipment. Having that security might give the lender more flexibility in some situations because they know that, in the worst case scenario, they could sell the collateral item to recover their loss. 

The Bottom Line

Borrowing during a financial downturn can be difficult and it might not always be the answer to your situation. Adding to your debt load in a weak economy is a risk. For example, you could unexpectedly lose your job and not be able to pay your bills. Having an added monthly debt payment in your budget can add another challenge to your financial situation.

However, if you can afford to borrow funds during an economic recession, reduced interest rates in these situations can lessen the overall cost of borrowing.

These tips can help tidy your finances so you’re a more attractive borrower to lenders. There’s no guarantee your application will be accepted, but improving your finances now gives you a greater borrowing advantage in the future.

The post How to Get Approved for Credit in a Financial Downturn appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

9 Ways to Support Small Businesses Without Breaking the Bank

We all have our favorite small businesses, including our go-to date night restaurant and favorite thrift store. These places serve more than great food and looks — they build jobs in the community, put children through school, and are the realization of your neighbor’s dream. 

These stores are built on hard work and love, and supply some of the best quality products you can find. Small businesses are a great sign of a thriving economy, but they’re also the first to suffer from economic downturns, like 2020’s COVID-19 recession. This is why it’s more important than ever to find ways to support your community’s businesses.

There are many reasons why small business success is vital. Not just for the economy but for our communities. That’s why Small Business Saturday (November 28) is one of our favorite times of the year, and why we collected these ways you can support small businesses without breaking the bank (or leaving the house!).

Shop Small Businesses

Shopping small is the easiest way to support community businesses and clear your holiday list. Shopping locally doesn’t have to drain your wallet, either.

Small businesses generate 44% of U.S. economic activity.

1. Skip the Hallmark Card and Support a Local Artist

Cards are a classic gift for any and all celebrations. They’re small, affordable, and easy to personalize. This year skip the grocery store and see what artists you can support while still getting beautiful and unique gifts for your family and friends. 

Most cities will have galleries, boutiques, and even tourist shops that display locally printed and designed cards to choose from. If you don’t have a shop near you, you can browse thousands of creators on Etsy to find the perfect design for each of your loved ones. 

2. Send Gift Cards

Gift cards are perfect for acquaintances, long-distance giving, and little acts of kindness every now and then. Instead of collecting Amazon and Starbucks cards, see what your local spots have to offer. 

Most restaurants and stores offer a gift card option, and you don’t have to waste the plastic! Send your gift via email to anyone, anywhere. So go ahead and thank your first mentor for their glowing reference with a gift card to their favorite coffee shop. 

3. Shop Throughout the Year

It’s true that handmade products can get pricey, but you’re ultimately paying for quality. If you’re already pinching pennies for the holiday season, start thinking about next year. Buying gifts for loved ones as you find them throughout the year is the best way to collect beautiful gifts without using credit. Plus, small businesses can use the boost year-round. 

Show Support From Home

Mockup showing someone fill in an instagram story template with favorite shops.

Download button for instagram story template.

Most of us have a budget that prevents us from buying a new wardrobe every month and eating out every weekday, so it just isn’t feasible to buy from all of our favorite local artisans all of the time. That doesn’t mean you don’t love them, you’ll just have to get creative to show your support from home. 

4. Share Your Favorite Products

When you do buy something new, take a photo! Sharing your favorite finds online and tagging the store is a great way to promote their products and quality to your friends and family. Even if you’re not buying, sharing a wishlist or their newest product could earn them another sale or new followers. 

“I think people forget that their voice has influence, whether they are a huge celebrity or a humble stay at home mom. It’s amazing just what one post can do for small business.” — Autumn Grant, The Kind Poppy

5. Write a Review

You should let the world know when you find a shop you love. From Google and Yelp to a company Facebook page, leave a review to let others know they’re in good hands. Positive reviews are some of the best tools businesses have to convert sales. 

“These types [local] of businesses live and die by word of mouth. Their reviews are everything to them. Now that everyone can look up the average rating of a business or service, it’s vital for businesses to collect positive, honest reviews.” — Dan Bailey, WikiLawn Lawn Care

If you do leave reviews, detailed thoughts and photos perform the best. These give the consumer plenty of information and help your review seem authentic. Plus, reviews can help platforms like Etsy and Google know the business is valued. 

6. Refer a Friend

Tell your friends when you find a new shop or service and share the love. Your friends trust you and likely have a lot of shared interests, so this word of mouth is a great way for businesses to earn customers. 

“A referral is the single best compliment to a business owner. Trust me.” — Brian Robben, Robben Media

If you have friends and family from out of town you may also want to keep your favorite businesses in mind for when they visit. Keep a list of local restaurants, cafes, services, and shops that they can’t get anywhere else and take your friends on a local tour. 

Keep in Touch

Businesses have more ways than ever to keep you in the know, so make sure you’re subscribed to keep in touch! Newsletters and social media are a good way to keep your local faves and their promotional offers top of mind. 

Mockup showing someone filling in their wishlist on instagram.

Download button for holiday wishlist instagram template.

7. Sign-up For Newsletters

Most businesses send regular emails to notify you and other customers of their store details and deals. Newsletters are great ways to find coupons, sales, and new items you’ll adore. Just subscribing isn’t enough, though. Make sure you actually read their news and whitelist the email so you never miss a thing. 

8. Follow and Interact With Their Social Channels

Social media is another easy way to stay in the know; it can also organically promote a business. When you follow a business, platforms learn more about who else may be interested in their offers. Stay active and like and comment on their posts, too, to increase their visibility and trust with other shoppers. 

9. Swing By the Shop

Ultimately, the best way to support a business is to stop by and visit. You never know when something will catch your eye, and it’s a great way to share your find with friends. You may also get the chance to talk with the owner and learn more about the business while sharing your support. 

“Drop a note to them of encouragement. Tell them why you love them and what they mean to you and the community…We’ve been absolutely floored when people have taken time out of their day to write us a note, telling us how much they like us/our product.” — Meaghan Tomas, Pinch Spice Market

No matter the product or service, small business owners will appreciate hearing that you love their shop and can benefit from your support. Tag a friend, buy a gift card, or write a review to help your favorite stores without busting your budget. 
Small Business Administration | G1ve 

The post 9 Ways to Support Small Businesses Without Breaking the Bank appeared first on MintLife Blog.

Source: mint.intuit.com