July 3, 2007, 1:25 am

The Way Banks Look at You Part4: Managing their Portfolio Backward

by: The Financial Blogger    Category: Banks and You
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This is another post from my series about how banks look at you. Understanding their perception of individuals is sometimes crucial in order to get the approval you want. Even for the wealthy of this world, knowing the mechanic behind each decision will help to get more or to present your file in a much better way. Today, I’ll be explaining that most banks will look at the past to predict the future.


As most people know, the history of a company’s stock is not granting its future. However, Banks will consider much bigger weight to your past than your potential as an individual. Credit people must be very rational with the decision they make as they need to justify any bad moves they make. It is definitely not an easy position.


Therefore, they like numbers. They want to see facts. Talk to them about an individual’s credit history, about his pas employment since 1995 or about an increasing net worth for the past five years. They will base the bulk of their decision on what happened previously in one’s life.


Start using credit at a young age

As small investors, they tend to forget about what is coming. To defend themselves, they will answer back that they can’t predict the financial situation of one individual in time. However, they can surely analyze what he did in the past. This is why it is so important to start having credit at a young age in order to show a solid and steady credit history. Sorry for those who always pay cash, you are not doing the right things. Why don’t you use your credit cards and pay them off at the end of the months. With that strategy, you will build a strong credit history in addition to benefit from all credit cards rewards.


Banks will lend according to their existing portfolio

When a bank lends money, it invests in that individual’s capacity to repay this loan. It believes in their chances of getting their money back. Depending of their current status, they might look into riskier loans if they have a low rate of default. This is the main reason why it is the good timing to borrow now. The economy is going fine, the interest rates are still low and banks are making profit like they never did. As long as they feel safe about their existing credit portfolio, they will extend their credit rules to lend more money to more people.


Ask credit when you don’t need it

It may not make much sense to you, but the best time to borrow money from the bank is when you don’t need any. My parents once experienced this situation with their bank. They were starting up a new business and need funds to get things going. They then applied for a line of credit at their bank. They got declined because it was too risky to lend to a start-up business. They had to get other sources of financing to raise more capital. Three years after, their business was profitable and they were able to pay all their debts. Then, their banker called them to offer… a line of credit. Why they do such things? It is fairly rational. When do don’t need money, you will more likely pay any debts back in a heartbeat. Banks love to feel secure.


Banks are definitely weird financial creatures. Their balance sheet is upside down compare to a regular company and they forecast their risk of default based on individuals past credit history and capacity of building a net worth. However, you can tame the beast by answering the right answers to the questions. It’s only a matter of knowing what they are looking for.

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