You probably know from recent news reports or your own experience that lenders are tightening their standards, making it harder for some people to get a loan or charging more for some types of credit than in the past. But what you may not know is that credit is still available. "You need to make sure you are in the best position to get a good loan at the best price," said Janet Kincaid, Chief of the FDIC's Consumer Response Center.
Here are ways to try to get a loan that makes sense for you.
Try to raise your credit score, preferably months before you may need to apply for a loan or credit card. A credit score is a numerical summary that reflects how risky someone is as a borrower. Among other things, it takes into account how well the person has handled credit in the past. Lenders look at a credit score when deciding on loan applications.
By aiming for the best possible score, you may be able to obtain a lower-cost loan and save hundreds each year in interest, especially if you are borrowing to pay for a home or car. "You need to plan ahead," said Kincaid. "Before you even think about borrowing money, you should be taking steps that can ensure you will qualify for a loan or credit card with the best possible interest rate and terms."
If you intend to apply for a mortgage or a car loan, make sure your credit reports are accurate and do not include negative information about you that is incorrect. For more specifics about improving your credit score — and your borrowing power — see Your Credit Score.
Be a smart shopper for credit products: Many people looking for a new loan or credit card make the mistake of focusing on one thing, most likely the interest rate or the monthly payment, and they don't consider other very important and potentially costly parts of the package.
For example, be sure to check out the fees associated with the loan, which could dramatically raise the "real" interest rate you're paying. That's why it's important to shop among several lenders and compare the Annual Percentage Rate (APR), a required disclosure showing the total cost of the loan, including interest charges and many fees, expressed as a yearly rate. "A loan with a straight interest rate of around 5 percent could have an APR of 8 percent when you figure in fees or other charges," said Kincaid.
Likewise, if you have to borrow a small amount of money fast — perhaps to help make ends meet — do so wisely.
Many people turn to "alternative" financial services providers, such as pawnshops, car-title lenders (for a loan secured by the borrower's car) and payday lenders (for unsecured loans that borrowers promise to repay out of their next paycheck or regular income payment). "While the upfront fee for one of these loans may appear to be low, many consumers are unable to pay the loan when it is due, so they roll it over again and again and they end up paying very substantial fees for a very small loan," said Robert W. Mooney, FDIC Deputy Director for Consumer Protection and Community Affairs.
Before risking getting trapped in high-cost debt such as this, Mooney said, check with your primary financial institutions for lower-cost sources of short-term cash.
Save money on your existing loans and credit cards. For example, with your credit cards and department store charge cards, which tend to charge high interest rates, you can cut costs by paying off most or all of the balance each month. However, if you're unable to pay most or all of a card balance, pay as much as possible, at least the minimum amount the card issuer says is due.
Also consider your options if your lender raises the interest rate on your credit card. If you've got a good payment history, you can call your bank and ask it to reconsider the rate increase. "Sometimes banks will make an accommodation to keep a good customer, especially in the credit card area, where there is so much competition," said Joni Creamean, an FDIC Supervisory Consumer Affairs Specialist.
If it appears unlikely your lender will reduce the interest rate on your card, consider a written request to repay the outstanding balance under the "old" interest rate and terms. "If the lender approves your request, this means you'll save on the remaining finance charges but you'll probably also be closing your account," Creamean explained, "so be sure you have other options for borrowing money before you take this course of action."
You also can shop around for a credit card with a better interest rate, but factor in any fees you'd pay.
There also are ways to cut your mortgage costs, such as by periodically adding a little extra to your monthly payment (assuming you can spare the money). Doing so will reduce the length of your loan, which in turn can cut the total amount of interest you pay.
With any type of loan, make sure your payment is received on time. Don't wait to pay at the last minute. "Paying on time will help minimize the finance charges and stave off any potential late fees," explained Kirk Daniels, also an FDIC Supervisory Consumer Affairs Specialist.
In addition, be sure to read all the literature from your lender that describes account terms and conditions, starting when you open an account and later in your monthly or other mailings.
"Sometimes a lender may send a notice of changes to your credit card account and you may easily mistake it for an advertisement," Daniels added. "These mailings often ask you to confirm the changes or 'opt out' by providing notice to the bank. You don't want to be surprised when your next statement arrives and you find new or higher charges you easily could have avoided if you had responded to the mailing."