Is the increase in consumer debt due in the past 30 years due to easier access to debt or a behavior change?
Have people changed or have lending institutions changed?
- Yo, Teach!Lv 41 decade agoFavorite Answer
The simple answer... yes!!
Both have happened, and there are other factors involved as well.
With the deregulation of the banking industry there has been more competition for customers. This competition has led to banks offering debit cards (cutting into the credit card business, especially in the "sub-prime" area)
Once traditional credit card companies saw the money to be made in the sub-prime market, they started offering "prepaid" credit cards and offering regular credit to people they never would have extended credit to before.
Of course, it was not just the competition with traditional banks that got the process started. The Discover credit card company started the opening of credit because they had to in order to get their business started. People who could get a Visa or MasterCard, already had one and didn't need a new card. Discover concentrated on getting higher credit risks into the market by allowing them to get credit at a higher rate, and with higher fees. Obviously this not only worked for Discover, but it caused Visa, MasterCard and American Express to open up their credit practices.
So, Deregulation by the government led to increased competition. Those economic forces of competition led to the expansion of credit to less credit-worthy customers.
Now, how did consumer behavior change? The change in behavior is linked to a change in generations. The generation that remembered the Great Depression had a tendency to save, simply because of the experiences they had with a severe, and prolonged economic downturn. They knew that a rainy day would come sooner or later, and you needed to save for that eventuality.
That generation has been replaced by a generation that remembers the 1970s stagflation where savings evaporated in the double digit inflation. Also, the younger generation has experienced nothing but steady, growth unimpaired by inflation in the 1990s. These two generations don't save for what they want and keep a nest egg for emergencies. Why would they? They believe, from experience, that jobs will always be available if you have skills and there is no such thing as a rainy day.
OK, so this is more of a dissertation than a simple answer, but as usual...
Hope this helps,
Edit: One small addition. The above answer refers to the changed laws of bankruptcy. Interestingly enough, credit cards were recording record profits, but defaults were at an all time high when they brought a "responsibility in borrowing" bill to the House. In response to BILLIONS in campaign contributions, Congress approved the idea and passed the bill making it tougher for consumers to get out of debt during bankruptcy.
However, Congress did NOT introduce a "responsibility in lending" bill to make credit card companies think twice about making risky loans to consumers with very low credit scores. Now, we reap the rewards of their one-sided bill. Thousands of "sub-prime" home mortgages are in default, because of irresponsible lending that Congress refused to address three years ago.
- DufferLv 61 decade ago
THe lending institutions should take their share of the blame for being too eager, even reckless, to lend. However, no statistics are ever given about the effect of legislation on the lenders, prohibiting them from making some basic checks. Neither are statistics given for those who borrow by lying on the application form. The debtor is the poor victim here, but the honest debtors all pay the price in increased rates.
- cave manLv 61 decade ago
Yes it is way too easy to get money now. I used to be a Realtor and I remember how difficult it used to be getting people with decent credit scores approved for $60-70k mortgages. Today, you find mortgage companies approving mortgage loans on properties selling at $250k or greater to people with bad credit. The same goes for credit cards, auto loans, etc, etc, etc,. Today all a person has to do is want something and they can get it. Foreclosures and bankruptcies are at an all time high. As a matter of fact, bankruptcy was getting so out of control in this country that they had to change the bankruptcy laws. We live in a now society, where everyone has to have everything now, regardless of cost or the ability to pay. Peace and God bless.
- lady26Lv 51 decade ago
easier access to credit/ institutions have changed.
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- 1 decade ago
I say they both changed.