September 19, 2007, 7:00 am

The Way Banks Look at You Part 7: Lending According to the Economic Situation

by: The Financial Blogger    Category: Banks and You
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It may seem strange to some extent, but you are not the only individual affecting your own credit request. In fact, the whole population affects the economy by its credit behaviours. For example, when most individuals have job, earn good income and spend money, credit becomes easy to get. Banks look at the overall situation and determine whether or not the default risk is increased by the current economic situation.


Then, when you hear about the sub-prime lenders crisis in the United States, you can conclude that it will become more difficult to get a non-conventional mortgage in North America and maybe even further. This is one negative side of the globalization; other countries’ economy influences each other more than ever. This is why our market dropped when we went through the “Shangai Flu” earlier this year.


So if you are in a good financial situation right now, that you have a stable job, a decent net worth since your property value increases, I would strongly suggest that you get the maximum credit available today. However you must remain very cautious: the goal behind this is not to get you in financial troubles but to open future opportunity for credit. If you have problem managing your credit, please delete this post from your memory!


As the overall economy has been flourishing for the past five years, you have good chance to be able to increase your present line of credit or to use grown equity in your property. By opening a HELOC, you could start a Smith Manoeuvre. You could also use your property to consolidate your debts through a new mortgage. As lending conditions are favourable, it will be easier to get the maximum amount and a good rate.


But what’s the point of requesting more credit when I don’t need it? Well, you never know what could happen in your life. You never know when you will need credit. However, one thing is for sure, when the economic growth is starting to shrink, when the market is sliding and the house market is bouncing more than a tennis ball, banks will tie-up their money and wait for the storm to pass by.


Even if your financial situation is not presently affected by the economic slow down, banks will consider that you have much better chance to default as the overall financial situation of the population is not getting any better. It doesn’t mean you won’t get credit, it only means that they will increase their credit requirements.


Banks could revise their credit rules in order to accept smaller TDSR only or to request additional security for loans. They would likely appraise your property with a more conservative point of view if they feel the wind chill of the subprime lender crisis. There is nothing personal, they are in the business of lending to individuals thinking that they will get their money most of the time. If the overall conditions are deteriorating, their overall risk increases. Therefore, they will simply increase their credit standard to make sure to lend money to strong client. This is also why sometimes we feel that they are cherry picking their clients. It is because sometimes they do!



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I’ve been taking the opposite approach with credit cards. I’m closing them down except for a couple (the one I’ve had the longest and the one I use). I know that reducing the credit available to me is bad for my credit score, but I have no plans to take out loans in the future, and I don’t want the potential liability of the card or identity being stolen.

I guess if I owned a house I would probably think differently and get the largest line of credit on it possible for the reasons you suggest here, but for credit cards, it doesn’t seem worth it.

by: The Financial Blogger | September 19th, 2007 (10:00 pm)

TDS, you must know that you are fully insured against identity theft on your credit cards. Anyway, it is much easier for them to just take your identity and request additional credit cards than using your existing card. If you use your credit cards on a regular basis, you could make a lot of points out of it 😈

[…] have any project you would like financing for, schedule a meeting with your banker right away. As I previously explained, your financial situation might be in good shape but you might not qualify in term of the new […]