Hopefully we all know by now that we are in a global economic recession. If you don't know this, get out from under your rock (to follow the commonly used expression I have heard) and go on the internet (or blag-o-sphere, the "hip" people say, so I'm told). Online newspapers, social networking sites (mine anyways), even Youtube feature hints of this. Yes, Youtube (that's the video thing, right?). You might have noticed the sudden increase of "find your credit score here" ads. Well that's because people have started to care since the recession. But first, I'll explain what a credit score is in the first place.
You're still reading this! Wow! Keep it up! Please! So, credit scores are the bank's way to see if you're a good customer to give credit to. It's based on quite a few factors about how you use your credit and pay for it. The few that I know are the number of credit cards you have (the more, the lower your score, and the lower your score, the less apetizing a target you are to them), how much you use your cards (not too much, not too little), and.. okay that's all that I can remember. So basically, the higher your credit score, the more likely you are to get a loan from the bank. Scores have range from 300-850, the Canadian average being somewhere around 678. It is said that 620 is the minimum score needed to get a good (or "prime") loan from the bank.
Now, if you had a credit score below that, you would be a sub-prime customer (get it? Good loans are prime, so sub-prime is below that. Yeah.). But banks decided that they don't care how good your credit score is, and that they still want your money. And so sub-prime loans were created. As freaky and complex as they seem, they're pretty much just higher-interest loans, although delivered in unusual ways. Here something I found that might clear it up:
"There isn't a hard-and-fast rule on what makes a loan subprime. But generally they are riskier than regular mortgages because lenders are more willing to bend traditional underwriting standards to accommodate borrowers. Besides having a lower credit score, borrowers might wind up with a subprime loan if the mortgage was considered risky for other reasons -- such as borrowing a higher percentage of income or home value than normal, or borrowing without documenting income or assets. The resulting interest rates tend to be substantially higher than for conventional mortgages."
--some dude/tte (yep, here we don't discriminate) from The Wall Street Journal. See the full article here. Okay, I was hoping to hyperlink that and make it seem cool. Apparently I can't do that. Here's the slightly less stylish URL:
http://online.wsj.com/article/SB119662974358911035.html
So yes, the rumours are true: Banks want your money. Really bad. So much that they even give people with good, even great, credit scores sub-prime loans. Apparently, in 2000 41% of all sub-prime loans were given to prime customers. By 2005, it had gone up to 55%, and in 2006, 61% of sub-prime loan receivers were prime customers. That's not to say that sub-prime customers got prime loans instead. They got sub-prime loans too.
So now we're all buried in debt, and people were/are afraid to get mortgages because of insanely high interest rates; although they didn't know that they were getting sub-prime loans. See? It pays to be financially literate! So ultimately: A housing crisis.
So join the movement to teach people to read their financial reports. I apologize for the bad grammar and lame jokes, but I hope they were fun to laugh at anyway. But you made it through! And I'm proud of you for that (that's not creepy at all..). Follow us please (by clicking the "follow" button in the top right corner)!
Postpone bankruptcy. Become Financially literate!
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