It is easy to forget that there are millions of people who did not lose their jobs and are living through the recession without having to make significant financial changes. Many of these consumers have good credit or credit that would not prevent them from borrowing responsibly. The problem is they can’t find money to borrow right now.
It’s hard to believe that even people with good to excellent credit are having trouble getting credit cards, borrowing money to make large purchases, or obtaining personal loans. This is due the fact that consumer lending is being squeezed tighter and tighter even as the economy slowly pulls out of the economic crisis.
Consumers borrowed 1.7% less in October compared to what they borrowed in September. This was the ninth straight month of declines. It is a true dilemma too, for both the consumer and the nation. Consumers need to spend money to help bring the USA out of economic doldrums, but if they can’t get loans or credit then durable goods, automobile sales, and many other industries are going to be depressed.
The decline in consumer lending includes accessibility to credit cards too. It’s easy to see that people are buying less when you visit the local malls. During the holidays, shoppers would normally have arms loaded with purchases but you just don’t see it this year.
Consumers are called bank-dependent borrowers. Many people don’t understand that consumer borrowing and spending accounts for a large percentage of economic growth. In fact the number is placed as high as two-thirds of growth. So when the consumer lending is in the doldrums due to financial system problems then recovery is going to be much slower.
According to the Wall Street Journal article, “Lending Squeeze Drags On” (online.wsj.com viewed 9-December-2009) consumer and business credit markets have fallen by $1.5 trillion in value in the last two years. This is a 7 percent decline which is significant by anyone’s standards. The Wall Street Journal research department analyzed Federal Reserve data and research firms that trace credit markets to arrive at these numbers.
Here’s an interesting fact to consider. In 2005 it is estimated that 6 billion (yes…billion) offers for credit cards were sent to consumers. So far in 2009 only 1.4 billion have gone out. That’s a big decline in credit card offers. Consumers are shifting more and more to debit cards. The spending helps the economy, but it does nothing to restore consumer lending.
If consumers with good credit are having so much trouble borrowing money, then people with black marks on their credit reports are virtually shut out of the credit market for a long time to come. The best place to obtain credit right now is with an auto dealer carrying dealer financing or with retailers offering name brand credit cards.
There is one positive and measurable effect coming out of the lending squeeze. Household debt is falling from its astonishing high of 122% of total disposable income. Belt-tightening may be difficult, but it some cases it is good for the long run financial health of the consumer.
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