Posted on
March 03, 2011 by
Admin
For the last couple of years, we’ve heard about the tight credit market. It’s been more difficult to qualify for credit. Even credit card issuers reduced the amount of money they were providing. However, mailboxes are starting to see an influx of credit card offers, and things are getting a little bit easier (although we are still far from the heady days of easy money seen in the years leading up to the financial crisis). It might be a little easier to get approved for a loan or credit card now than it was last year, but that mean it’s a good thing?
Do We Really Want More Credit Available?
Our leaders tell us it’s a good thing for the credit market to ease. Indeed, the whole point of having the Fed Funds Rate so low for as long as it has been is to encourage borrowing. The reason that borrowing is so important to our economy is that much of growth depends on the ability of money to move through the system. Consumer spending is a big part of our economic growth, and consumers don’t have money to spend, the economy slows down. “Easy” money, in the form of consumer debt (like credit cards) enables consumers to keep the money moving through the economy — even if they don’t exactly have the money in hand.
So, while more credit approvals (and the spending that presumably goes with them) might be good for the economy as we have it, they might not actually be good for individuals. One of the things that our society proved in the run up to the financial crisis is this: If we have access to credit, we will use it. And that means indebtedness for many of us.
Credit Can Be Helpful
It is true that credit can be helpful. A looser credit market might also lead to less demanding requirements for mortgages and other large loans. For those trying to buy a home, credit can be a very helpful thing indeed, since few of us can plunk down a couple hundred thousand dollars to buy a house. Credit can also aid in purchasing a car and paying for college. These are worthy goals, and the way can be smoothed by credit. Additionally, for some, a huge financial emergency can be eased with the help of a credit card. (Of course, paying it all back can be it’s own financial struggle.)
There is no doubt that our society has come to rely on credit, and that it has its uses. But has our reliance on credit contributed to other problems?
Has Easy Credit Contributed to Price Inflation?
There are arguments that easy credit has helped accelerate price inflation. If home loans weren’t so readily available, would home prices have increased so quickly, forming a bubble? What about consumer items. If people saved up for them, rather than buying them immediately, perhaps they wouldn’t gain in price at the same rate. The ability to borrow means the ability to pay a higher price for everything from college to a TV to food. Is it possible that easy credit also means that inflation proceeds at a faster pace?
While it would help the economy if the credit market were to ease, it might not help individuals — especially if those individuals are willing to use credit without thinking about the implications.
What do you think? Is it a good idea for the credit market to ease?
Copyright © Free From Broke – A Personal Finance Blog Please visit for more great content!
Is It a Good Idea for the Credit Market to Ease?
Free From Broke
