Trend: The good old days of easy credit are gone and consumers and businesses who depend on it will have tough adjustments to make.
Michael Panzner says
Americans will have little choice but to lose a dependence on borrowed money that has become an increasingly pervasive feature of everyday living during the past few decades
Link: Is the Era of Easy Credit Over for the Long Haul?
Experts say that even when the current credit crunch eases, the nation may finally have maxed out its reliance on borrowed cash. Today's crisis is a warning sign, they say, that consumers could be facing long-term adjustments in the way they finance their everyday lives.
A prolonged period of tighter credit is ahead, experts say.
U.S. consumers will find it much harder to get a credit card, and to carry large balances. Late fees will rise and lines of credit will be reined in. After years of buying homes with interest-only loans, or loans that allowed people to borrow more than the value of the home, substantial payments and downpayments will be required. Interest rates are also likely to rise.
Lenders, far more wary of risk, have tightened the standards they use to judge potential borrowers. Regulators will be looking over their shoulders.
The changes cap three decades in which U.S. consumers - along with businesses and government - have run up ever-increasing debt. Americans became accustomed to financing purchases large and small with plentiful credit cards, easily approved loans for cars and the latest conveniences, and by siphoning the equity in their homes. Lenders did far more than just make credit plentiful. They aggressively marketed it as a necessity, a way for the smart consumer to leverage themselves into a better lifestyle.
The financial meltdown has made clear the role an increasingly global economy played in facilitating U.S. consumers' borrowing, with banks packaging and selling debt to investors, providing cash to people who once would have been considered too risky to get a loan.
The expansion of credit has, in many ways, been a good thing. It has allowed many more people to buy homes. At a time when household incomes have stagnated, borrowing has made it possible for many people to afford purchases and cover short-term expenses they might otherwise have had to delay or abandon.
But all that borrowing came at a heavy cost.
- Americans are more reliant on debt then ever before.
The portion of disposable income that U.S. families devote to debt hit an all-time high in the second half of last year, topping 14 percent, figures from the Federal Reserve show. When other fixed obligations - like car lease payments and homeowner's insurance - are added in, about one of every five household dollars is now claimed by bills.
The credit card industry lobbied heavily in 2005 to tighten bankruptcy laws to make it more difficult for consumers to seek court protection and shed responsibility for paying off debt. But in a sign of just how much households have become dependent on borrowing, the average amount of credit card debt discharged in Chapter 7 bankruptcy filings has tripled - to $61,000 per person - from what it was before the law was passed.
- Americans, borrowing to cover ordinary living expenses, have all but abandoned saving.
The U.S. personal saving rate dropped to well below 1 percent in late 2007 and early this year, according to figures from the federal Bureau of Economic Analysis. The figure has edged up in the last few months, but the actual savings rate may still be near zero, given that many people are covering living costs by using credit cards or money saved earlier, according to the BEA. The lack of savings is a sharp contrast with the decades after World War II. Americans routinely saved more than 10 percent of their income in the early 1970s.
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