The 'Democratization of Credit' Is Over -- Now It's Payback Time | Hacker News Reader

The 'Democratization of Credit' Is Over -- Now It's Payback Time

online.wsj.com

23 pointscwan10 comments

This: "Most of the credit cards she had were maxed out by 2004. She would sometimes just let the bills pile up and not pay the minimum."

..then this: "Last fall, wanting to buy gifts for her mother and sister and clothes for a young niece, she applied for credit and was rejected at Macy's and Dress Barn, finally getting a card with a $250 limit at the Children's Place." is what's called living beyond your means. Credit != free money.

We take financial education for granted, but many in the bottom tier have no understanding of monetary management. They jump on the opportunity to spend the money because they lack the simplest comprehension of financial obligation and a balanced budget. This isn't to say their actions are valid, but rather to emphasize the dire need for financial education amongst our youth.

I don't think having no understanding of monetary management is strictly a bottom tier problem, the resent financial problems have exposed plenty of people in the middle and upper tiers as well. Lack of money management education is really a problem across the board.

Having an understanding and making smart decisions don't always go hand in hand. I suspect many people know what they are doing is bad for their financial health but simply don't have the will power to do the right thing in the near term because the adverse consequences only come years down the road.

I'm not sure how much of it is lack of financial education, and how much is a combination of peer pressure and general attitude in the nation. When everyone around you living off the debt, when "whole America is living in credit" is a popular truism, when banks pushing the cards and credits down and market them aggressively, it is easy to lure self into thinking that it's actually normal and how life is supposed to be. Because those banks wouldn't be throwing money at you if they knew it's wrong, and all those people with heavy mortgages and debts can't be wrong, right?

Education isn't a panacea. Most people who get into debt do understand the system, but choose to ignore their indebtedness.

I cannot remember where I read it, but the evo-psych explanation for this behaviour is that prehistorically most problems could be solved by hiding for the problem and waiting for it to go away.

Isn't lack of education across the board a big part of the reason many people are in the "bottom tier" to begin with?

Sort of -- lack of education of the parents, relatives, and peer group is the big factor.

This:

"When a utility to which she owed $300 offered to settle for less, Ms. King says, she declined, because she was told an overdue bill takes longer to come off a person's credit report when it is settled for a partial payment."

Probably has something to do with this:

"she lost the shoe-store job in January, and then learned that a prospective new employer had rejected her after running a credit check. Fearing that her credit record would trip her up again and again, she resolved to fix her financial mess." and other bits and pieces like it.

I wonder if this kind of heightened awareness of credit scores, service to help people repair them, using them as a proxy for other things and such invalidates credit scores as a measure of creditworthiness.

What happens if the "market" suddenly loses faith in the idea of credit scores as a measure of default risk?

Based on a back of the envelope calculations I don't think the article's premise is plausible.

Just take the housing market, for example. Suppose people thought that housing prices would grow at the rate of inflation for the next 10 years... suddenly the prospect of whether to continue making payments on the next 10 years of a 30 year mortgage looks rather stupid. So these homeowners will be inclined to sell, driving prices down and leading to more sales, etc.

The above housing market deflation is precisely what the Fed wishes to avoid, so we can bet that monetary policy will be geared very specifically to prevent it, not just through interest rates, but through other actions that are done specifically to prop up housing prices.

In order to keep housing prices high, cheap credit will need to continue to be available to lower/middle income people...

We're already seeing the idea of "credit as a right" from policymakers... notably in the area of healthcare reform... even conservative economists have advocated things like a "healthcare credit card" issued by the government. Credit card companies are being treated more like providers of public utilities than as private businesses, etc.

All this suggests that credit will be more democratized (and politicized) than ever... it is, I think, the extension of traditional Keynesian economics to include the "time shifting" aspect of credit, but with all the same goals otherwise.

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