Is Credit Culture Changing? Old Habits Die Hard
I wish I had a crystal ball that shows to what extent the mortgage crisis will ultimately affect American culture. Data show the crisis is changing people's attitude toward use of credit and savings, forcing many to make forward looking lifestyle adjustments because of unemployment or a loan modification.
According to some industry insiders, Americans are changing credit habits, maybe reluctantly.
"Old habits die hard. Servicers need to realize that modifying a loan is only part of the solution. Along with the lower payments, servicers need to educate customers on how to avoid future problems by planning, budgeting, and have a better sense of the importance of good credit," says Ken Lin, CEO of Credit Karma. "Good servicers should have proactive e-mails, newsletters and counselors to help discuss these specific issues. A few dollars spent on education could save tens of thousands of dollars down the line. "
Mr. Lin makes his comments after seeing that expectations on the most recent unemployment data by the United States Bureau of Labor Statistics for August indicate a slight increase compared to July. High unemployment rates force many homeowners to miss payments and take on additional debt. According to the OCC, only 35.5% of loans modified in Q3 2008 were current as of March 31, 2009, he said, because for many it is simply taking too long to find a job.
Credit Karma was created to provide tips on how to manage personal finances while unemployed - such as to protect the credit score and preserve accessible credit lines despite earnings or credit card regulatory changes. For example, borrowers need to be reminded that: To preserve their credit they must use their cards regularly even if it is just to buy groceries once a month and make sure bills are paid on time. Sometimes even employers conduct credit checks. Borrowers with credit issues need encouragement to talk to their lenders to work out more convenient payment options. If debt amounts are high there are debt consolidation or debt settlement options. In short, users of the Credit Karma website are advised about better ways to manage their credit. And advising borrowers online or face-to-face is one of the most important parts of the loss mitigation process.
As lenders continue to cut credit, including home equity lines of credit, the overall borrowing capacity has been shrinking, says Greg Hebner, president of California-based MOS Group and COO of Sorrento Capital. "Americans are nervous, they have started to save again. It's crazy." Easy credit made the U.S. a country of spenders and higher quality of life. In most cultures credit is not easily accessible and debt, including credit card debt, has a negative social connotation.
Now a multitude of websites educate Americans to be proactive, better informed and save more and borrowers are paying attention. Mr. Hebner warns that people cannot just google, "a google search on flu symptoms brings up a lot of information that is hardly related to your case, which is why the human factor is the most important factor in loss mitigation." He says there is not enough good information available online. "Most of the feedback comes from attorneys' offices or people who are trying to make a buck. There's not a lot of free, well -intended help out there."
If lenders shoulder the cost, free, qualified online information is also available, he says, so while it is scary to think that mortgage makes up to 75% of some people's income, the culture is changing. "People are dieting, many quit smoking. That did not exist in the 1980s and 1990s. Hopefully Americans will be able to do with their money what they are doing with their health."