No more easy credit

New credit rules go into effect soon. I’m not sure how they will affect me, but don’t mind if they help keep credit stable long term. The new rules will limit who can get credit. It will also change credit interest rates and terms so those who have the most at-risk credit will pay more. I think it’s about time for this change. I don’t have much sympathy for those who run up massive amounts of credit then complain when they can’t pay the bills.

Easy credit made it possible for people and companies to live beyond their means. They could charge what they wanted and make small monthly payments. They got used to a higher standard of living than they could actually afford. What many people didn’t understand is that by lowering the monthly payment, they were actually increasing the time they would need to pay the item in full. In the meantime, they pay interest on the amount, which could potentially double the price of the item now that higher interest rates are likely.

New rules on who gets credit will make it so those who are the most financially responsible will pay the least and those more at risk will pay more. This is fair. Credit companies and banks are businesses not charities. They take a risk when they issue credit that you may default on the balance leaving them holding the bag while the consumer has the goods. Higher interest and lower limits for the more at risk consumers helps limit their risk somewhat.

While I understand that during a low economic period may not be the best time for consumers to have the new credit rules take effect, it is the best long term solution as it will help insure credit stays available for those more worthy of it.

“Not everyone either deserves or should have an open-ended credit card,” said Roger C. Hochschild, chief operating officer of Discover Financial Services.

Joining those who won’t easily get cards: college students and others under age 21. The law strictly limits card marketing on campuses, ending giveaways like T-shirts and pizza. Cards can only be granted to applicants who show they have the means to repay, or those who have a co-signer who can pay.

I had trouble getting credit in college before the days of easy credit because of this. However, I paid all my small bills on time. Then I was approved for a car loan and paid that off early. I try to only use credit as necessary, not on a whim. I only have one credit card. I did buy a new mattress set on credit, but paid it off within a year so I wouldn’t have to pay interest. Now I have good credit and lower interest rates, but still live within my means.

The credit bubble has burst.  It isn’t necessarily the fault of the lenders. While the lenders may have made lucrative offers or targeted those more at-risk, ultimately it was the consumer who used the credit and made the purchases. They made a choice to use credit rather than living within their means, now they need to be accountable for it.

Unfortunately, it will be harder for those who charged money indiscriminately to get caught up. I would urge people to get credit counseling and educate themselves about how to use credit and prioritizing wants. They need to learn to live within their means. This may mean lowering your standard of living. However, if you can’t afford it without increasing debt, you probably would have to do this eventually anyway. The sooner you realize this and take action, the sooner you can start to recover financially. A good company is Crown Financial Ministries. They offer many different credit counseling and financial planning packages and programs to help people reign in consumer debt and learn to live within their means.

Some people think a government bail out for defaulting consumers and companies is needed. I don’t think the government should bail people out. I feel sorry for them, but why should a person with good credit have to pay the debts of those who aren’t financially responsible and won’t live within their means? Besides, our government already has massive amounts of debt itself.

The U.S. government also needs to learn to live within it’s means too. New social programs are nice and sound like a good idea, but where will the money come from? At some point taxes must go up. We can’t keep borrowing from our future. That’s what created this problem. All a bailout or new social program would do is shift the debt from individuals to the public in the from of higher taxes. It’s unfair to penalize those who make good decisions to pay for those who made bad ones (both privately and corporately).

This is just how a free economy works. Some make money, others fail. While I feel sorry for employees of companies that made bad decisions who are hurt through no fault of their own by job loss, this is normal and long term helpful for economic stabilization. Being free to take risks, is what drives companies to profit. No one complains when the risk pays off. Then they call it good business. When it falls apart, people cry foul and beg for regulations. But, the more regulations on a business, the less risk they will take. Therefore they will have less profit and will either pay lower wages or have fewer employees and dividends. How does that help recovery long term? It doesn’t. Reform legislation should achieve a balance between protectionism and risk.

I like what I’ve seen of the new credit laws. It protects the lenders from high risk consumers. They protect consumers from predatory lending practices. While their may be a sudden changes for some people, overall, they seem more fair as long as lenders don’t take advantage of possible loopholes. The days of easy credit are over and our country will be better off for it as people start to live within their means again.

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2 Responses

  1. I’m a no-credit person myself. The old truck has to last until I can save enough for another vehicle; I probably won’t buy a hous until we retire. I’ve seen too many people crash and burn on credit-fueled binges! You are so right – the first step is for people to live within their means. Here in Canada we have a television programme called “Til Debt Do Us Part,” wherein a very sensible financial expert helps family solve their credit problems. They have to learn to live on cash. She usually works out a plan where they can pay off their debt in a year or so. Then they can start some real saving toward retirement or university for the kids. She helps them find ways to reduce spending, consolidate debt, get rid of bad habits and think in a new, financially independent way. They could do it themselves – but usually, they’ve never tried!

  2. Magdelena,
    I’m always amazed by how much stuff people think they “must” have and what their financial priorities are. We have tenants who we evict and/or abandon their apartments. Usually they are full of junk. The kind of stuff displayed in store windows: expensive electronics, toys, CDs and video games (usually broken), clothes. There’s several people who buy a new car instead of paying their rent. One woman I found package delivery slips from clothing shops. She could afford new clothes, but not the rent! It’s all about priorities.

    The worst people are those getting out of the military. I wish they gave them financial counseling before they were discharged. Instead, they go from having a great support base to nothing and usually they have no idea how to deal with spending and budgeting. As a result, they usually fall behind in rent because they bought cars and toys without considering next month’s rent out.

    I’ve only had one eviction that didn’t have a place full of junk. The young man was living very frugally. He had a chair, bed, nightstand, a few changes of clothes and small tv. His kitchen had just basic staples, nothing expensive or fancy. We actually let him stay a month longer because he wasn’t being wasteful of the little resources he had.

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