Rebuilding Your Wealth: Loans and Credit

Anyone who’s ever taken out a mortgage or a college loan knows that borrowing can be the key to building future wealth. But now that risky debt has sunk Wall Street, lending standards, by some measures, have tightened to their strictest levels in 15 years. With banks disappearing overnight, surviving bankers are fiercely protective of their balance sheets and probably would think twice about lending to their own grandmothers if they didn’t sport bulletproof credit.

As a result, your credit score—the measure of your reliability as a borrower—is worth protecting like the crown jewels. The basic rules for improving your score haven’t changed: Pay bills on time, keep balances low, and vigilantly monitor your credit report for mistakes. But more than ever, even little steps like doing without a department-store charge card can help, since a couple of points may mean thousands of dollars in savings on a mortgage. And just to show how the credit game has evolved: Two years ago a score of 650 would get you the best rates; now that threshold is as high as 740.

The good news is that for the 37 percent of Americans who surpass that score, money could still be plentiful, says John Ulzheimer, president of consumer education at Credit.com. For borrowers with sufficient equity in their homes, rates on equity lines of credit, for example, are already 30 percent lower than they were a year ago. However, since banks may still freeze these lines of credit if property prices tumble in your neighborhood, don’t use the money for something you can’t live without. Access to loans in the auto-loan market, while tough, isn’t as difficult as in the mortgage market because defaults haven’t yet been as bad, says Greg McBride, senior financial analyst at Bankrate.com.

For those not at the top of the credit-score class, it can pay to wait. Jason and Kellie Martel overextended themselves on credit card debt in their 20s, shopping liberally even though Jason was just starting up his delivery business. Since then they’ve focused on building up savings, paying down debt and boosting their credit scores while raising two kids in a Tampa, Fla., suburb. As the local real estate bubble burst, the couple found themselves in an enviable position—eligible for the best mortgage rates, even as prices dropped. So recently, they started hunting for a three-bedroom ranch house with a pool. “We’re nervous,” says Kellie, “but we feel like we’re in a good position.”

For borrowers who don’t have time to strengthen their credit ratings, credit unions can be an option. These lenders are more inclined to look past the credit score to see whether other circumstances, like job history and other assets, make you creditworthy. And for those who can’t find money even here? Well, the credit crunch may lead more Americans to finally heed calls to save more. “Perhaps this is the wake-up call needed to safeguard the future,” Ulzheimer says.