Any way you look at it, we're at the crossroads of a financial crisis, facing the meltdown of our entire economic system and lifestyle. The consumer mindset that has been prevalent in America over the past 50 years has suddenly changed, and nobody is certain exactly how to fix things.
Lenders are tightening their standards for credit
Just to give you an idea of what I mean, let me share a personal experience with you. I have a friend that has near-perfect credit. It's true, he always pays his bills on time, and has never had any negative marks on his credit. His credit score is right around a 700. The only reason it's not higher is that he has a short credit history.
That's right, with a 700 credit score and no negative marks, he was turned down for credit
A week or so ago, he moved into a new place, and needed to get a washing machine and dryer. He found a set he liked that would have monthly payments within his budget, and filled out the credit application. His credit application was denied. That's right, with a 700 credit score and no negative marks, he was turned down for credit. If it can happen to him, it can happen to just about anyone.
Is this another depression?
Although the economic climate in our country is far from bright and rosy these days, it may not be as dire as you've heard. Although the media are pitching their gloom and doom forecasts that we're heading into another depression, it's just not true. There are plenty of things that make this different from the great depression of 1929. Like I said at the beginning, the decisions you make will determine how you and your family come out of this, so knowing that we're probably not headed into another Great Depression and keeping a calm and deliberate approach to your finances is the first thing you need to concentrate on.
Three ways today's economic position is different than 1929
There are three key factors that are totally different from the Great Stock Market Crash of 1929 and the onset of the Great Depression, so pay attention.
- We have the FDIC
Established in 1933 mainly as a result of several bank runs that followed the stock market crash, the FDIC basically ensures that depositors aren't going to lose anything this time around.
- The Fed is cutting interest rates now, not years down the road
In 1929, The Fed took a more hands-off "wait and see what happens" approach, rather than realizing the role it could play to soften the blow that many investors felt after losing their life savings and sometimes more. This time around, The Fed is actively working to stabilize the economy. They know that they're a player and not just a spectator, and they're doing their best to bring an "A" game.
- The bad loans in this case have been made (mostly) against tangible assets.
In 1929, the Stock Market Crash was brought about by "A long streak of speculative lending [that] got out of hand as banks and even staid industrial companies made a stream of risky loans." As Karen Blumenthal of the Wall Street Journal explained in her October 8, 2008 column. She goes on to point out that these loans were for stocks, something that isn't truly tangible. Today, the bulk of the loans that have burdened our economic structure are home loans, a tangible asset. In other words, if a company dissolves, its stock is no more than a puff of smoke, but a house isn't going to just disappear, there's a tangible asset that will continue to hold some value.
Now that I feel a little better about things, what can I do to "weather the storm"?
Now that we can agree that another Great Depression isn't knocking at our door, let's discuss a few strategies that can help you make it through. Remember, we've survived before and we will this time, too. The dot-com bust of the early 90's was pretty dramatic, too, and yet, you're still here and doing fine.
Traditional wisdom suggests that you make a budget and stick to it. Cut out all unnecessary spending. Reduce your debt. Live within your means. All of these are tried and true strategies to making it through any economic downturn, whether it's personal, local, or national. But there's one more strategy that hasn't been mentioned that can make a big difference in this case, because this economic downturn is different than any that have come before. This new strategy is called Credit Repair.
Credit Repair may help you come out ahead
You see, because this current economic downturn is the result of lenders over-extending themselves on questionable credit risks, they're feeling a little burned and are following the same basic tactics I described above, reducing their debt, sticking to a budget, etc, but they're also tightening their standards on lending. After all, poor choices in lending and credit risks have already forced the collapse of several banks, and the remaining institutions have taken notice.
Knowing that lenders are tightening their standards, cleaning up your credit reports seems like a pretty logical step. After all, if even people with excellent credit, like my friend I mentioned in the beginning aren't being extended credit, what kind of chance do you stand with good (or even fair) credit?
Repairing your credit is a pretty straightforward process, and you can find all sorts of information on how to do it and what firms to hire on the Internet, so I won't go into it here. I will say this, however: sooner or later the lenders will relax their standards and start extending credit again. The better your credit is, the more you'll be in a position to not only survive the crisis, but come out ahead in the long run.
Just remember, the basic rules of the economy haven't changed. There's boom and there's bust, and the pendulum swings both ways.