According to Credit Karma, a non-government company, nearly half of American households fall below the creditworthiness line. The drop is because of the unresolved issues on employment and salary. The problem is, banks don’t seem to heed the warnings issued by the federal government. These traditional financial institutions still continue to release loans even to high risk borrowers.
Banks are desperate to lend out cash because the government has kept all lending rates at the lowest. As a result, the requirements for auto loans and credit cards have significantly decreased. Credit scores no longer being used as one of the primary requirements for the approval of loans. And if ever they are used, they are no longer required to be as high as before.
Loans Are Profitable
Loans and credit cards are seen to be very profitable these days because of the increased demand for additional sources of emergency funds. In fact, the need has grown so big that nontraditional lenders have begun to mushroom both online and offline. But also because of the more intensive competition, lenders are bettering their terms, increasing their advertising and lowering their requirements and interest rates too.
Because of the profitability of loans, particularly the auto loans, and credit cards, they are expected to grow and expand in the coming months. However, there are still only a few consumers who have the banks’ offers. More are said to take advantage of third party lender services because of the short term commitment and absolutely no credit check.
Did Government Intervention Help Reduce Debt?
According to reports, government intervention has made it possible for borrowing to decline. For the last 24 months, alone, average credit card debt per person has gone down from $7694 to $5403. Meanwhile, average mortgage debt went down from $174,447 to $166,990.
But some economists have another explanation. They believe that the reduction of debt can be attributed to two things: it’s either consumers are now more frugal or they declared bankruptcy, default and debt forgiveness. Others even turn to other forms of credit just to cope with the expenses.
Examples of these other forms of credit that are quite popular today would the bad credit loans. So while credit card debt has declined, personal and student loan debts have reportedly increased. To prove these claims, average student debt jumped from $28,183 to $29,092. Consumers are also no longer swiping plastic because they now prefer to pay in cash or not spend at all.
The shifting could be because consumers find these alternative loans cheaper or their requirements easier to accomplish. With credit scores still relatively low because of the just-concluded recession, consumers would naturally look for better alternatives. Whatever the reason may be, the end-result remains the same: overall non-mortgage debt is now higher than ever.
If there is one thing that should be learned from the recession, it would be that consumer spending habits should adjust to the current times in order to avoid getting too many loans. At present, the economy is still ailing and your credit score could still drop. So it is best to remain wise in your spending.