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Highlights
- Low FICO® score doesn’t necessarily translate into non-availability of credit in future
- Lenders charge a higher-than-usual interest rate when borrower’s FICO score is under stress
- To increase income level and manage debt, one may invest in fundamentally strong stocks
Debt can turn bad, especially at times when the national economy is passing through a rough phase. What can be the best debt advice to tide over such crisis situations?
Before we jump to that, let’s find out one of the most overrated debt advices, which we may care less for.
Also read: Best saving strategy while preparing for any natural disaster
Obsolete debt advice
The most outdated debt advice revolves around maintaining a good FICO® score. Yes, lenders take a note of it to assess credit risk, but there is more to this.
The credit markets of developed countries have evolved. It has become ultra-competitive with the entry of new lenders. Undeniably, a bad FICO score of below 600 can jeopardize the chances of getting a loan, but it does not essentially mean that the borrower will not find any interested lender.
What happens is the rate of interest charged on the loan goes a little higher.
There are multiple lending institutions that deliberately look for borrowers with low FICO scores. If such a borrower has a good debt-to-income ratio, which establishes that the monthly income is enough to cover loan repayments, then the lender will be more than willing to lend. They will charge a higher-than-usual interest rate, and this is what their business model is.
Debt in the times of pandemic
Debt scenario is set to undergo a paradigm shift due to the economic slowdown brought by the pandemic.
Many borrowers may face difficulty in maintaining a good FICO score, but the forces behind this failure are related to macro-economic aspects like high unemployment and subdued wage growth. At such times, lenders still have to stay in business, and they will be compelled by the market forces to lend to borrowers with low FICO scores.
Also read: The trick to save extra 20 dollars every week
Dealing with debt
One of the best ways to reduce your debt, once you accrue it, is paying it off timely.
Repayments generally come out of income. However, it isn’t so easy to increase income considering the pandemic economy.
However, pandemic markets played out very differently. The TSX Composite Index surged to record levels in 2021. In June, it surpassed 20,000.
Consider this. The S&P/TSX Composite Index has returned impressively in 2021. There are many stocks trading on TSX that can be a good buy as we enter the year 2022.
Also read: Is it the right time to invest in an electric vehicle?
Bottom line
Having a low FICO may not always be punitive. Lenders compete with each other to find borrowers, but yes, low FICO score may mean a little higher interest rate. A good advice to deal with debt is to invest in credible stocks to lift income levels.
