We are all subprime now

Special to the Star-Telegram

Just two years ago many were e-mailing me or calling the radio show to ask about their options for buying a car, while admitting that their credit scores had suffered from a poor repayment history. I was always torn in discussing these issues, knowing full well that 17 years earlier these individuals would simply have had to wait — and pay their bills on time — for up to seven years to clean up their credit. Or, if forced to acquire a slightly better ride than they currently owned from a "tote the note" used car lot, they would pay interest rates that were close to loan sharking. Over the years in this column I’ve discussed personal credit many times; despite all the positive economic realities of living in North Texas, and although ours is one of the nation’s more vibrant economies, something is terribly wrong. For Dallas Fort Worth’s collective average Beacon (credit) score is the lowest metro area score in America – just 650.

How could that be? Dallas Fort Worth has grown by leaps and bounds over the past three decades, thanks to our economy. Texas has almost always been the last state to fall into the numerous recessions in our lifetimes, and certainly it’s been the first to come out of them. Our home foreclosure rates are nothing compared to the national average – and yet Detroit has a better average credit score than the DFW area does.

Credit Landscaping Job of a Generation

While deeply involved for two decades in automotive retail, I saw this happening in bits and pieces. This too I have covered in numerous columns, but it bears repeating: In the mid-seventies, you very rarely got someone trying to purchase a new car who had a truly bad credit rating. By 1988 many more individuals with poor credit were out there shopping for new cars. Those who did were apologetic about their financial circumstances, while sincerely asking for help in acquiring a loan.

As the years passed and these credit-challenged shoppers’ numbers grew, so did a new dynamic: If the dealership did manage to secure them a car loan, they were incensed when charged a higher interest rate than shoppers with a near perfect credit score.

This reminds me of one case; that of a Hewlett-Packard vice president wanting to buy a new luxury car in the early nineties. What hurt his credit score was one thing that had nothing to do with non-payment of loans or his annual income, which was nearly $100,000. What was it? He had charged more than that annual income on credit cards, including new cards just issued, in the previous six months.

The credit buyer at American Honda turned him down because he believed this man’s intentions were dishonorable: After buying all these goods he would declare bankruptcy — letting him wipe out his debts but keep the stuff. The car, as the credit buyer put it, was his final acquisition before the bankruptcy, so he could have something nice to drive during the period his credit was ruined. Furious about being turned down, the man threatened legal action. But sure enough, within the week, the American Honda credit buyer called back: "Guess who filed for bankruptcy today?" I’ve forgotten where that individual finally purchased his new car before declaring himself bankrupt, but that case was a definite object lesson in how the credit landscape was changing.

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