These days, borrowers with solid credit scores can find attractively competitive terms. But move quickly: Yardsticks of creditworthiness are changing
The credit crisis has given Scott Briggs and his wife, Catherine, unusual leverage in their search for a new home. In October, to get the best deal on a 30-year fixed mortgage for a home in Austin, Tex., the couple persuaded the seller to agree to an unusual contingency clause in the contract of sale that let them back out, without penalty, if they couldn't get a mortgage carrying a 5.875% interest rate and no more than one point in closing fees.
The couple—he is a partner at Ascend, a jet hangar manufacturer, and she is a pharmaceutical sales rep—have near-perfect credit scores. Adding to their bargaining power, they plan to put 20% down on the four-bedroom, two-bath home in downtown Austin that they covet. They're also pitting two lenders against each other. "With rates bouncing around, we want to get the lowest rate possible," Scott says. Keith T. Gumbinger, vice-president of HSH, a mortgage market analyst, says that's smart: "There are a lot of hungry mortgage originators, so great credit-quality borrowers are in the driver's seat."
Though the lending spigot has slowed to a trickle for consumers with dicey finances, those with stellar credit, ready cash, and a little creativity can use the turmoil to their advantage. The yardsticks of creditworthiness are changing. Two years ago borrowers with a score of 650 out of 850 qualified for the most competitive interest rates. Today, they need at least 750 for the best deals. Also, experts once advised consumers to keep their credit-card balances below 35% of their credit line to maintain a high credit score; now 20% is the maximum allowed for a top score.
Recessions tend to make consumers want to shore up personal balance sheets. One strategy for stockpiling cash is to tap a home equity line of credit (HELOC). Sure, falling housing prices mean fewer of these credit lines are being given, and many borrowers are seeing their home equity credit lines cut back or eliminated. But those who can still tap their HELOC can use it to build up cash and, in rare cases, make a little money. If your HELOC rate is 5% or lower, consider drawing down that cash and buying a one-year certificate of deposit that's yielding north of 4%, says John Ulzheimer, president of consumer education at Credit.com. You'll also get a tax deduction, which can help make up for the difference. "If HELOC rates go up, pay down the money and you are off the hook," he adds. The main point is to gain access to cash, with the arbitrage a side benefit.
With the housing market weak, consumers may want to pad their cash cushion before the financing window closes. Scott Gale of Irvine, Calif., drew $480,000 out of his HELOC in July, just in case he needs extra money for his residential development business. Gale, who has a top credit score and no credit-card debt, split the money between CDs and high-yield bonds. "I'm not planning to touch the money for at least 18 months, but it is good to know it is available for my business," Gale says. (He hopes the high-yield markets will stabilize by the time he needs the money and deliver a nice return on his investment.) A month after Gale tapped his HELOC, he got a letter from his lender saying that the remaining credit line was shuttered due to market conditions.
With auto sales stagnant, car buyers can also find bargains. Frank Luppino, who owns a specialty lighting company in suburban Chicago, purchased a 2008 Chevrolet Avalanche in October for $14,500 off the list price. His high credit score of 801 out of 850 allowed him to get the rate on the dealer-financed loan cut from 5.5% to 4.9% just by asking for the best possible offer. "It was done in less than 10 minutes," he says.