With the way in which the inflation is proceeding, and the resultantly stretched budgets that many face, I think it’s crucial to address what kind of steps should be taken with regards to credit. The first and most important thing to realize given what has been transpiring is that borrowing money is, quite obviously, not free. Which is what makes the massive upswing in consumer debt so concerning. Although I do my best to make sure this site isn’t a place that is anything other than educational, it is important that you don’t borrow money you are not certain you can easily pay back, and certainly not to indulge in luxuries you cannot afford. Already, the major banks have reported increased loan loss provisions, and the lending standards for individuals have begun to tighten. It is now more than ever that you should be careful with your credit. Any blemish will remain for 7 years, and so it is vital to prioritize it. If possible, I would advise not falling behind on your payments - obviously…
In most cases, the best thing to do is to engage your lending company, and ask them for help - whether that be slightly deferring payments or even skipping 1 or 2. Given most students have unsecured personal debt (credit cards and the like), the lenders’ only way to recuperate their losses is through your willingness and so are usually more than willing to make an arrangement. Sometimes, they will allow you to remain in fully good standing by making only partial payments for example. I would however also advise being cautious as similar to what we’ve discussed earlier in our credit cards articles, the interest you don’t pay compounds, resulting in you paying substantially more than might be expected.
In the absolute worst case scenario, when missing payments is impossible, it is usually best to do some prioritization. The impact to your credit will be undeniable, but you should do your best to minimize the impact. Usually, it makes the most sense to prioritize the lenders whom you wish to do business with again, or if you have a collateral-based loan, as well. If you have a history with a bank, it usually makes sense to stay in their good-graces as they have internal credit scores different from Equifax and the like based on your performance with them. By maintaining a good relationship, you mitigate the damage. Meanwhile, if you default on a collateral-secured loan like a car loan, that can be seized upon missed payments so that should take #1 priority. Finally, it is always important to consider the prospect of bankruptcy, though that is absolutely a last-resort and should only be used by those with no options, and with a substantial number of debts. The costs are long-term to your credit, and virtually guarantees you cannot be approved by a big bank for a while, so you need to be careful.
Overall, the credit you establish now will stick with you for a long time… Although everything can seem overwhelming, taking steps now is crucial to protect the long-term viability of your options past this recession. In the next 7 years you are likely to want a vehicle or even potentially a mortgage, and defaulting on a $300 credit card can cost you 10’s of thousands in marginal interest payments on a mortgage. The way that creditors analyze credit is incredibly critical, and even more so now that credit standards are tightening. Even one blemish on a Revolving type of credit can be enough to cause a lender to decline your file or offer you incredibly high interest rates, especially for students that don’t have a lot of other credit to offset the problems they’ve faced. Luckily, over time, if you don’t allow it to be written off, and are simply late a few times, eventually paying the account can demonstrate a willingness to cooperate even during tough times… It can be incredibly difficult to budget during tough times, and debt is always something to be cautious of exactly because of situations like these, but it is always important to consider it and in the worst case know how to prioritize taking care of it.
By: Mateo Gjinali
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