The banks are hurting. The recent meltdown in the subprime has hit their bottom line hard. Do I have much sympathy for them? No, not really but I am concerned about their financial health. Why you may ask? Do I own stocks in the big banks? No. The real reason that I am concerned about the banks is because of you.
You see when the banks feel pain they try to pass the pain on to us. Now some may argue that it was us who got the banks into trouble in the first place by being late with our mortgage payments. My response to that comes in the form of a stack of bank letters that contain offers of loans, credit cards and mortgages dating back a couple of years. These were allsorts of sweetheart deals just to get me to sign up for one of their financial products. If we were the cause of the problem then I would say that it takes two to tango Mister Bankman. You were my best friend two years ago.
Passing on the pain
So interest rates have been cut but the banks don’t seem too eager to pass on the full cuts? Why is that? Well the simple answer is that banks have become so distrustful of each other that they are reluctant to lend to each other let alone lend to me or you. As a result of this credit crunch when the banks do lend to each other they lend at higher rates of interest because they are now a lot more worried about the risk of default. The credit crunch is hitting the bottom line hard. Banks and financial institutions have become more focused on controlling the quality of the customers that they try to sell their products to.
What this means for you
The financial pain being felt by the banks has wide implications for you. Even if you have an impeccable credit history with very little or no debt and a good income the banks will still be reluctant to lend to you. This means that if you want to get a mortgage you will have to jump through a lot of financial hoops to get it.
It’s nothing personal – it never is with the banks. You are simply just another number to them. They have their computer models that determine whether or not you are creditworthy. If the computer says you are creditworthy then great, if the computer says you are uncreditworthy then you get cut. It’s as simple as that. However in recent years the models that the banks have used seem to have been thrown out the window. People who clearly had very little means to repay their mortgages were give large sums of money to buy houses with. When these people eventually stopped paying the banks woke up and started to re-evaluate the way they lent money. A little too late I might add.
Since the bank looks at you not as a person of ability but instead as a set of numbers it is time for you to start thinking in a similar way. If you want to be financially successful and rid yourself of the burden of debt then you need to start looking at your financial life as a set of numbers. The key numbers in your financial life will be
1. Your credit score
2. Your income
3. Your total credit card debt
4. The number of years until you plan to retire
5. Your overdraft
6. The amount and number of outstanding loans
7. Your mortgage and how many years are left on it
By reducing your financial life to a set of numbers you begin to speak the same language as the bank. No matter how emotional your appeals to the bank are in relation to your debt situation they will fall on deaf ears. The reason why they will fall on deaf ears is because you are not speaking the same language as the bank. As soon as you start speaking the same language as the bank things will start to open up for you.
You need to see things from the banks perspective. They have automated all their lending decisions based on your credit score which in turn is based on your credit history. To get ahead and get on with the bank you need to keep on top of all the key financial numbers in your life.