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Ten-year Treasury yields closed at 4.71% on Thursday and while that’s off recent highs, it’s certainly enough to spook advisors and clients about the specter of 5% yields and ongoing carnage in the bond market.
As advisors know, higher interest rates mean higher borrowing costs for everyone, including consumers. As just one ominous example, a mortgage that cost $2,000 a month just three years ago now requires a monthly payment north of $2,700.
Add to that, interest rates on 30-year mortgages are around 7.95% and interest rates on auto loans are at highs not seen since 2008. Put it all together and anyone outside of the “excellent” credit camp seeking credit today is going to be subjected to punitive borrowing costs.
That’s one of saying that while advisors aren’t in the business of credit counseling, they can add material value for clients when it comes to building and improving credit and now is an appropriate time to engage clients in related conversations.
Why Now for Credit Chats
Having good credit is always fashionable, but for clients that aren’t familiar with credit-building and those that aren’t actively keeping up with interest rates, it pays for advisors to have credit conversations here and now. The reasoning is simple: Good credit is a money saver and ALL clients like saving money.
“Consider a mortgage: If you have excellent credit, you could secure a loan with an interest rate that’s as much as 1.5 percentage points lower than someone with marginal credit,” notes Morningstar’s Margaret Giles. “That could save you hundreds of dollars every month—thousands every year for the life of the mortgage. So, if you have a $250,000 15-year mortgage with a fixed interest rate of 8.5%, you’ll pay about $193,000 in total interest. If you get the same mortgage with an interest rate of 7%, those interest payments come out to around $154,000, saving you roughly $40,000 on the mortgage loan.”
Many clients find credit daunting and much of that apprehension is attributable to lack of education. Advisors can start with the basics, including that FICO scores range from 300 to 850 and are comprised of five factors: payment history on revolving and installment loans, amount owed relative to available credit, age of accounts, new credit and the forms of credit possessed.
Advisors should prevent clients from getting too wrapped in trying to get 850. It’s almost impossible and the point is some credit experts say lenders view everything from 740-760 and beyond as essentially the same. The point that should be driven to clients is pay on time. Always pay on time.
“Stay on top of due dates. Sign up for automatic bill pay if your credit card company has that option or set a reminder for yourself a few days before your payment is due,” adds Giles.
Tips to Pass Onto Clients
It’s easy and not time-consuming for advisors to add value on the credit front and it’s a value-add proposition that’s likely to be appreciated by younger clients, including millennials and Gen Z.
For those worried about building credit, a secured credit cards are viable options, particularly for those working to get out of subprime territory. Auto loans, though better to wait until prices and rates decline, accomplish similar objectives.
“Data reveals that many people who default on other types of loans still tend to make their car payments to keep using their vehicle. Also, auto loans generally require a down payment and are considered ‘secured’ because the car itself is collateral,” concludes Giles. “The auto credit score used by auto lenders is different from the regular credit score, though it is also calculated by FICO. Many auto lenders base their lending decisions on your auto credit score, which is calculated primarily on your previous auto loan history and not your overall credit.”