Tim Harris Personal Finance 201 February 25, 2005 Global Credit Availability: In today's world of personal finance and economics, with the global perspective being the primary focus. Corporations, just like individuals, are looking at expanding their horizons and saving or making as much profit as they can. How do they accomplish this gigantic and often expensive proposition? The answer to this is through credit. However I poise a question to everyone. Is the ease of which to receive credit today a hindrance and detriment to all of us, or is it the answer we have all been looking for? I will show you both sides of this situation and you are the judge. The term credit according to the 1992 issue of New Webster's Dictionary is; a transfer of goods, etc...
in confidence of future payment, to enter on the credit side of an account; to procure credit or honor to ("Credit"). The term domestic credit in the Dornbusch Microeconomics book is the monetary authority's holdings of claims on the public sector - government debt - and on the private sector - usually loans to banks ("Domestic Credit"). According to our Personal Finance book; "Consumer credit dates back to colonial times. While credit was originally a privilege of the affluent, farmers came to use it extensively. No direct finance charges were imposed; instead, the cost of credit was added to the price of goods... All economists now recognize consumer as a major force in the American economy...
To paraphrase an old political expression, as the consumer goes, so goes the U. S. economy (164)." These terms all mean one thing, as we the public, government, and businesses receive credit, we must be responsible with it and ensure that we repay our obligations. In today's global economy credit is the single most important tool most consumers and businesses have. Credit when used properly allows us to grow and purchase items we might not otherwise have the funds for. The United States has had credit reporting information and accounting since 1956, and with all of this available information global models are now being created for other countries to follow.
It is said that without the use and availability of credit the global economy for countries not easing up on their credit reporting will not grow and keep up with the rest of the world. In the report, Lesson's from the U. S. experience; "The full benefits of comprehensive credit reporting have yet to be realized in most other countries, because the amount of personal credit history available to lenders for assessing risk varies widely around the globe.
Historically, credit reporting in most countries began with the sharing of so called "negative" information (delinquencies, bankruptcies, etc. ) on borrowers. Only gradually and recently has information about the successful handling of accounts (prior and current) been contributed to the data repository (1)." Translated this means that other countries mostly report only negative activity which restricts the availability of credit to its population, resulting in slower or non growth economies. So what are the benefits of issuing credit? After a quarter century of experience within a comprehensive reporting environment the United States has produced an impressive list of benefits. In the report, Lesson's from the U. S.
experience; "Detailed information about a borrower's past payment history, including accounts handled responsibly, as well as a current profile of the borrower's obligations and available credit lines have proved to be an important tool for assessing risk. The resulting benefits include: o Dramatic penetration of lending into lower socio-economic groups, making a variety of consumer loans available across the income spectrum. o Reduction in loan losses that would have accompanied such market penetration in the past o Ongoing account monitoring and use of behavioral scoring by creditors to adjust credit lines and take early preventive action if a consumer is showing signals of over extension. Preventive measures include contacting customers to offer budgetary counseling or concessions on terms to prevent bankruptcy or charge off. o Encourages entry of new competitors, including non-bank financial institutions, which has stimulated vigorous price competition and more convenient products o Made feasible the of consumer loan receivables (e. g.
, mortgages, auto loans, credit cards) which has lowered the cost of providing credit and brought hundreds of billions of additional dollars into consumer lending markets. o Lowered the prices for other financial products as customers have been freed from their binding relationships with banks and other depository institutions. In the past the customer's own bank was frequently the lowest cost source for a loan because other creditors lacked the information needed to measure risk. Consequently, banks have been forced to become more competitive for customers at all margins. o Made consumers (and workers) more mobile by reducing the cost of severing established relationships and seeking better opportunities (29, 30)." So what does all of this mean? Let's look at some numbers from 1956 to 2003 and get a better perspective. At the end of 1998, mortgage credit owed by consumers totaled about $4.
1 trillion, including both first and second mortgages and the increasingly popular home equity lines of credit. Non-mortgage consumer credit (including credit cards, auto loans and other personal installment loans) totaled an additional $1. 33 trillion. At the end of 2003, total consumer credit totaled about $9.
3 trillion, including mortgage credit and non-mortgage consumer credit. Whether or not these sums are large given the size of the population, perhaps the more impressive numbers relate to the growth in the proportion of the population using credit. For nearly the past 40 years, federal policy in the U. S. has encouraged the credit industry to make credit and other financial services available to a broader segment of the U. S.
population. The result of these public policies has been a dramatic increase in credit availability to all segments of the U. S. population, particularly to those toward the bottom of the socio-economic spectrum who need it the most. In 1956 about 55% of U. S.
households had some type of mortgage or consumer installment (non-mortgage) debt. In contrast, by 1998 over 74% of all U. S. households held some type of debt.
Put another way, 29. 7 million households used consumer or mortgage credit in 1956, compared to 75 million households in 1998. So as we can see the availability of credit does increase a country, business, and individual's ability to grow and prosper. So what about the negative aspects involving credit? How does a debtor's inability to pay hurt us? We find that in 1998 consumer delinquency ratings involving credit were approximately 4% of total outstanding balances. In 2003 the consumer delinquency rating was about 9.
3% of total outstanding balances. Or translated 1998 dollars were $21. 72 billion; and 2003 was $152. 2 billion, this is still a great deal of money (loans) outstanding; however without the availability of credit where would our economy, jobs, and living conditions be.
How does this translate globally? As the amount of credit made available per capita increases in countries that lack comprehensive credit, prices will escalate more sharply as compared to the United States. Consumer loans will likely be more costly in terms of finance charge as well as other features of the loan including down payment, convenience of access, credit limits and fees. Less accessible consumer credit will impair the growth of the durable goods industries in countries with more limited credit reporting. After researching the availability of credit and its implications perhaps the greatest disadvantage of using credit is the temptation to overspend, especially during periods of inflation.
It seems easy to buy today and pay tomorrow using cheaper dollars. But continual overspending can lead to serious trouble. Look at the consumer's delinquency rating of 4% in 1998 and the increased delinquency rate in 2003 up to 9. 3%. Even though this number in 1998 was $21.
72 billion and in 2003 it was $152. 2 billion, it may be less of a cost to pay than when we translate it into higher product costs, lower standards of living, and less availability of goods, services, and jobs. The use of credit provides immediate access to goods and services, flexibility in money management, safety and convenience, a cushion in emergencies, a means of increasing resources, and a good credit rating if you pay your debts back in a timely manner. Credit when used wisely and keeping the delinquency rating low is a valuable and necessary tool.
It allows a country, business, and individual the ability to improve and grow. But always remember, the use of credit is a two-sided coin. An intelligent decision as to its use demands careful evaluation of your current debt, your future income, the added cost, and the consequences of overspending. In keeping with the times and globalization, credit and the availability of credit is what makes economies grow and prosper, and what are economies made of? They are made of people, businesses, and countries. So what is life about, if not the ability and opportunity to better oneself and the world, thru credit? Works Cited Barron, John M.
, Michael Staten. "The Value of Comprehensive Credit Reports." Lessons from the U. S. Experience Summary (2000): 1 - 32"Credit." New Webster's Dictionary.
1992 edition. Dornbusch, Rdiger. , et al. Macroeconomics. 9 th ed.
Ed. Lucille Sutton. New York: NY, 2004. Kapoor, Jack R. , Les R. Dla bay, and Robert J.
Hughes. Personal Finance. 7 th ed. Ed.
Michele Janice k. New York: NY, McGraw-Hill/Irwin, 2004 References Cole, R. , "The importance of relationships to the availability of credit." Journal of Banking and Finance. 1998 Fisma n, R.
, "Trade credit, financial intermediary development and industry growth." Journal of Finance. 2003 Ken nickell, Arthur B. , Martha Starr-McC luer, and Brian J. Sure tte, "Recent Changes in U.
S. Family Finances: Results from the 1998 Survey of Consumer Finances," Federal Reserve Bulletin. January, 2000, pp 1-29. Scott, J. , "Small business and the value of community financial institutions." Journal of Financial Services Research. 2004 United States.
Board of Governors of the Federal Reserve System. Federal Deposit Insurance Corporation. 10 Nov. 1999 web States. Federal Reserve Board. 10 Sept.