Global Credit Availability

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:

* Dramatic penetration of lending into lower socio-economic groups, making a variety of

consumer loans available across the income spectrum.

* Reduction in loan losses that would have accompanied such market penetration in the past

* 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 overextension.

Preventive measures include contacting customers to offer budgetary counseling or

concessions on terms to prevent bankruptcy or charge off.

* Encourages entry of new competitors, including non-bank financial institutions, which has stimulated vigorous price competition and more convenient products

* Made feasible the securitization 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.

* 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.

* 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