Do we really need help with getting more debt?

By Xin Lu. Last updated 22 February 2010. 21 comments

Today a new rescue program called the Term Asset-Backed Securities Loan Facility (TALF) was announced by the Treasury and Federal Reserve to support owners of securities backed by credit card debt, student loans, auto loans, and loans approved by the Small Business Administration.  Supposedly this initiative will free up consumer credit, but the question is, are we really in need of more debt right now?

This week I received a letter from one of my credit card issuers that informed me that they closed one of my inactive accounts.  I have not touched that card for more than three years, so it was fine with me.  In the same week, I received about five to ten different credit card preapproval letters that I could use to replace the one account I lost.  Although this is anecdotal, most people I know already have enough credit cards and getting a new card is as easy as going to the mailbox and returning a form.  I have yet to read a news report that name actual credit card issuers who are lowering their credit card approval rates so it seems that the credit card markets are far from frozen.

As to auto loans, it seems that lenders are tightening their lending criteria.  Edmunds.com says that consumers with average credit will be required to make down payments as high as 20% and loan terms are shorter.  Basically, loans are still being made, but consumers need to have good credit, and that does not seem like a bad thing.  If auto loans are truly impossible to get, then consumers could simply save up and pay in cash.  In many instances, used cars are not so prohibitively expensive that you have to finance it with a loan.

When it comes to student loans, it seems that private loans are frozen for the most part, but there are still plenty of opportunities for students to get federally backed loans.  Again, this may not be a bad thing because private loans usually carry much higher interest rates than federally backed loans.  If enrollment truly drops significantly in universities due to lack of financing for students, then it is possible that many private universities may consider reducing their fees or handing out more grants, and that is also good for the consumer.

Finally, there are the small business loans.  According to this article in BizJournals the volume of small business loans made so far this fiscal year through the Small Business Administration's 7(a) loan program  is 55 percent below the same period a year earlier due to the inability of lenders to sell their loans on the secondary market, reduced demand for credit, and tighter lending standards.  It is possible that the TALF program could open up the secondary market for these loans again and more small businesses can be started, but it may be that many entrepreneurs are shying away from starting a business in the current economy. 

Right now, I do not know how much this new plan will help consumers, but it would certainly help the investors in these debt backed securities right away.  I really do not think Americans need  any help in getting more credit card debt or loans to buy flashy cars they cannot afford, but debt to start small businesses may create new jobs and spur economic growth.  For the most part, I think  this is a good time to eliminate  debt, and not acquire more. 

Have you had trouble getting credit recently?  How much do you think this new rescue program will affect you?
 

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Guest's picture

Isn't it funny how the answer to every financial problem seems to be another bail-out?

Like the credit card example you raised, its trading one problem for another.

Guest's picture
wildigft

I have to wonder if all these bailouts for banks are the current philosophy. There's heavy opposition to loaning money to companies like GM that make actual products, but there's trillions of dollars available for companies that create financial products that put us in debt. What is up with that?

Guest's picture
Guest

Reducing debt should be a priority and I think you are right that people don't need more credit but rather more adjusting. Unfortunately I think the process of adjusting to living within ones means will be very painful for Americans as a group.
Even if GM goes bankrupt and all the jobs get lost things will find the way to balance themselves; the question is always how long it will take for them to do so.

I still believe it is just time to bite the bullet.

Guest's picture
Amy

I haven't personally had any trouble getting credit, and I"m sure many Wise Bread readers wouldn't have the problem either.

However, I have been watching Suze Orman every Saturday and it does seem that a lot of people ARE having trouble getting credit. There are probably a lot of people that would like to consolidate their CC balances to a lower interest card and that isn't an option anymore.

I don't really agree with the bailout plan because much like the first one, it does nothing to discourage the borrowing and lending practices that got us into trouble in the first place. I also think that people might be a bit cautious right now and are probably a little reluctant to buy buy buy.

Guest's picture
vilkri

We as a country have to learn how to live within our means again. Only then can we regain the footing that has made the US such a successful country. The debt that was taken on in the past has to be repaid at some point in time. The time is now.

Guest's picture
Kelja

One of the major reasons why we're in the financial mess we're in is easy credit. Greenspan, in particular, left rates too low for too long. Like grain alcohol in the punch bowl, it had an effect.

The only way to go back to the 'good-ol'-days' of pre-2006 is to re-ignite the economy with easy credit again. So the thinking goes.

The problem is this: what if loans were available but no one wanted them? I know plenty of people who qualify for good loans - car loans, home loans, business loans - but are not taking them. Sure credit is jammed up, but if it wasn't would it make any difference as we lurch into a deep recession?

People are uncertain now about the future. They are pulling inward; trying to save and not spend too much.

This is something the punditry doesn't like to talk about.

Guest's picture
Guest

Won't having that credit card "closed" for inactivity damage your credit score? Your credit card is part of your credit history, and by losing that history, your score loses points.

Tsk, tsk.

Xin Lu's picture
Xin Lu

erm..guest.. i didn't close the credit card.. the credit card company did it for inactivity.  It doesn't affect your score as much as you think.

Guest's picture
spaces

Thank you for this. I tend to think of it as: No, buying more big screen teevees on credit cards is NOT the way out of this mess. Not spending quite so much more than we earn is now a bad thing?

The other day, heard a story on the radio w/power companies whining because consumers had cut back on their usage. It's bad for their balance sheets, apparently. Conserving electricity is now a bad thing?

I can't speak much to auto loans. But tuition: Its totally out of control, and often completely disproportionate to the value of the education the student obtains. But I am a heretic, and do not think that education for education's sake should be debt financed, or directly subsidized.

I also recently had a CC account closed by a creditor for inactivity. And I don't, and won't, miss it.

Guest's picture
Amy

Hmmm

How long of an "inactive" period does it take before they close the account? I don't really plan to use my Amex card since finally paying it off but I still want to have it around in case of an emergency (as in I need to pay for something that can't wait a few days for a transfer from my savings). Oh, and I want to use the points it has accumulated ;)

Guest's picture
spaces

Amy, from what I've heard, the circumstances preceding closing CC accounts vary widely.

In the case of mine, it was issued by WAMU about a year and a half ago with a several-month 0% purchase teaser rate, and I used it for exactly one (big) purchase right when I got the card, which I paid off well before the rate went up. It was closed by WAMU within the last two weeks.

Hope this helps.

Guest's picture

I just did an article about this on my blog. I feel the same way. Consumers do not need more credit...I think that is why our country is in the mess it is in. I wish they would put money into a program to help educate the consumer instead of destroy the consumer with more debt!

Guest's picture
wildigft

The credit crisis is a little different from personal debt. What's happened is that the big money is afraid to lend to big enterprises. I think, at some level, they are more cautious about money, and quicker to stop loaning it out. If there's even the remotest chance of losing money, they want to hoard the cash.

Regular people, on the other hand, often put themselves at risk of losing money on their so-called business investments. Paulson thought that giving money to the banks, so their risk would be offset by the free cash, would get them lending again. Clearly it hasn't. They're hoarding it until the investment climate is more favorable.

Someone forgot to inform them -- they are the investment climate, and they're causing a global freeze.

If the banks don't get into gear and start taking some risks to save the global economy... well, they don't deserve the help. Let them "chill out" and rot. I think they should give up on the banks, and lend the money to other sectors of the economy that will actually use it. That's the whole point anyway - to re-prime the pump of commerce.

Guest's picture
Guest

I may be totally out of touch with the American way of life but why do you need credit?

I keep reading "so and so can't get credit" or "I haven't personally had any trouble getting credit."

Other than paying for plane tickets online (website doesn't allow me to just pay other way) I have no use for my credit card.

So, lets assume you are not flying anywhere or that you just go and buy the tickets at the counter. Why do you really need credit for?

Guest's picture
wildigft

Why do we need credit?

1. Our educational system is not funded through taxes. Most of it is privately owned. It costs a lot to attend. Credit allows people without sufficient money to attend college.

2. We don't have socialized health care. Instead, we have insurance, but some 50 million people lack insurance. For many them, credit allows them to purchase some health care. Some old stats said that 70% of bankrupt people have put health care costs on credit cards.

3. The cost of a house typically exceeds the income and savings of families that are young and want a house to raise a family. A mortgage is used to purchase the house.

4. Many people need a car, but don't have enough to pay for the car they wish to buy. The auto industry wishes to make a profit. So they issue credit so these people can buy cars. (In countries without credit, the cars are simpler, but these cars are mocked in the West.)

5. Businesses have uneven cash flow, but have a pretty steady set of expenses to pay. Credit is used by business to ride out these periods of low income.

6. Farms buy seed at one time of the year, and sell their product at a later time. They use credit to buy the seed, and pay it back when the crop is sold.

Guest's picture
Guest

just get out of your credit card debt. How? Well start by never using them unless it is an emergency. Next- pay off as much as you can every month.

Guest's picture
Guest

ok, I have to agree on #1 with you. It is really sad that education is not meant for the masses in the USA.

2.- We also have to pay health insurance. But it is just a normal bill per month. We just put it in the budget. I personally pay the equivalent of about 150 USD per month. I don't put it on credit.

3.- If you are young and can't afford a house then don't buy one. The mortgage only makes sense if in real terms it saves you
rent money and by real terms I real mean doing the math on the cost of the mortgage and the closing charges, etc. vs the price of the rent. The kids will grow just as fine in a rented apartment as in a house.

4.- "wish to buy" can include too many things you don't need. And getting "mocked" for owing a "simple" car as a need for credit to buy something more sofisticated doesn't sound to me like a strong argument.

I stay ut of businesses because I was just talking about individuals but I still find it bad planning when a farmer that grows stuff year after year fails to just set aside a portion of last years income for next year seeds.

Guest's picture
wildgift

(FYI, I don't own a house. I buy cars with cash. I went to a public college. I've used all kinds of health care payment schemes.)

The reasons I listed were not the ones I use, but the ones the markets/banks/average people use to justify the need for credit. I think they're relatively legitimate reasons, because there are many things that are very difficult to save for, and the benefits outweigh the cost of the debt.

A car loan makes sense in the same way as a school loan -- it's all about timing and work. Many jobs require a car, or living in a low-rent neighborhood often implies a lack of reliable bus service. If riding the bus to work costs you a few hours a day, and results in a smaller paycheck or limited opportunities, then the car loan makes sense.

Getting a mortgage, if you have kids, often makes sense, even if it costs more than renting. You gain equity in the house. You also don't face rising rents. If you care about schools - you often find that the public schools in areas with families with mortgage burdens can be good, because the parents are all in the system, and have "skin in the game".

Debt is a kind of bondage... but with bondage, you can institute discipline. BDSM - Bondage and Discipline, Stability for Markets. At least that's the idea.

Guest's picture
Jay Kay

1) We're in this mess because we (individuals and the country as a whole) have been living way beyond our means. We consume too much and don't produce enough. This has been largely caused by the gov't itself (Fed, Fannie, Freddie, etc.) by making too much money too easily available (read: too much credit, too cheaply available). The chickens are now coming home to roost.

2) I'm afraid the fix is for the country to endure lots of pain and get off the credit merry-go-round, including the government. If you havn't noticed among all the talk about credit cards (individual debt), our gov't is the biggest debtor in the world. Individuals are going bankrupt but our gov't has been bankrupt for a long time now. Trying to fix this mess by creating MORE cheap credit will, at best, only push the problems further into the future when they will become even more severe. Individuals, companies and banks are rapidly "deleveraging" (read: reducing debt). Our gov't is still going in the opposite direction.

3) people talk about the "Global Crisis" but we seldom hear about the fact that we (the U.S.) are the cause.

4) A personal note: I've had an average-paying job all my working life (I'm now 65 and still working). My wife also worked for most of our married life. We bought our first house (after living in apartments for a couple of years) with 30% down payment and a 6% mortgage. We put 6 kids through private (read: expensive) secondary school without credit. We never bought a car using credit until just a month ago, and the reason we did that was that it would have been silly not to take their money for 3 years for free (0% interest) while our money sits in CDs earning money. We simply never had a new car. Never bought a car we couldn't afford.

We use credit cards a) for convenience and b) to get the cash back they give us. We never carry a balance and so never pay any interest. We realize we're not their favorite customers and the day they start charging us fees for not carrying a balance will be the day we dump the cards.

5) I'm sorry. As I re-read this post it really sounds like I'm crowing. My only intention is to try to point out what kind of excesses our gov't and many of our citizens have indulged in and what a different approach looks like. People like Dave Ramsey and other financial advice gurus recommend this kind of approach (Dave even recommends buying a house for cash!!).

Guest's picture
Bri

The only bad thing about the difficulty getting private student loans is that the people who are in school now or going into college may not have the money to go to school withouth them. Yes, it would be great if the schools would lower tuition or give out more grant money but that can take YEARS to happen and does not good to those that are trying to complete their degree now.

Guest's picture
Guest

I don't think you realize how much available credit has been cut from the general public in the past 18 monhts, about $1-trillion of un-used balances, with another $2 trillion to go. If you have an 800 Fico Score, you wouldn't be aware of this, but the average american, has a Fico score under 720, and they have all had thier available limits cut back. An average guy with only a $3,000 to $5,000 balance available, has had his line cut anywehre from 30%, to just a hair over whatever the outstanding balance is right now. That little game causes lots of over-limit events, which causes fines that result in 35% to 50% interest returns to the credit card lender, and stretch truth-in-lending laws to the limits.

Bottom line, look out Christmas, that card debt is what the average american has been using to buy X-mas gifts for the past 15 years, and this year....they don't have it. Retialers are in for a shocker of a lifetime, that nobody is really admitting to.