Personal Finance 201
February 25, 2005
Global Credit Availability:
In today's world of personal finance and economics, with the global perspective being the primary focus. Corporations, just like individuals, are looking at expanding their horizons and saving or making as much profit as they can. How do they accomplish this gigantic and often expensive proposition? The answer to this is through credit. However I poise a question to everyone. Is the ease of which to receive credit today a hindrance and detriment to all of us, or is it the answer we have all been looking for? I will show you both sides of this situation and you are the judge.
The term credit according to the 1992 issue of New Webster's Dictionary is; a transfer of goods, etc
in confidence of future payment, to enter on the credit side of an account; to procure credit or honor to ("Credit"). The term domestic credit in the Dornbusch Microeconomics book is the monetary authority's holdings of claims on the public sector government debt and on the private sector usually loans to banks ("Domestic Credit"). According to our Personal Finance book;
"Consumer credit dates back to colonial times. While credit was originally a privilege of
the affluent, farmers came to use it extensively. No direct finance charges were imposed;
instead, the cost of credit was added to the price of goods
All economists now
recognize consumer as a major force in the American economy
To paraphrase an old
political expression, as the consumer goes, so goes the U.S. economy (164)." These terms all mean one thing, as we the public, government, and businesses receive credit, we must be responsible with it and ensure that we repay our obligations.
In today's global economy credit is the single most important tool most consumers and businesses have. Credit when used properly allows us to grow and purchase items we might not otherwise have the funds for. The United States has had credit reporting information and accounting since 1956, and with all of this available information global models are now being created for other countries to follow. It is said that without the use and availability of credit the global economy for countries not easing up on their credit reporting will not grow and keep up with the rest of the world. In the report, Lesson's from the U.S. experience;
"The full benefits of comprehensive credit reporting have yet to be realized in most other
countries, because the amount of personal credit history available to lenders for assessing
risk varies widely around the globe. Historically, credit reporting in most countries began
with the sharing of so called "negative" information (delinquencies, bankruptcies, etc.) on
borrowers. Only gradually and recently has information about the successful handling of
accounts (prior and current) been contributed to the data repository (1)." Translated this means that other countries mostly report only negative activity which restricts the availability of credit to its population, resulting in slower or non growth economies.
So what are the benefits of issuing credit? After a quarter century of experience within a comprehensive reporting environment the United States has produced an impressive list of benefits. In the report, Lesson's from the U.S. experience; "Detailed information about a borrower's past payment history, including accounts handled responsibly, as well as a current profile of the borrower's obligations and available credit lines have proved to be an important tool for assessing risk. The resulting benefits include:
Dramatic penetration of lending into lower socio-economic groups, making a variety of
consumer loans available across the income spectrum.
Reduction in loan losses that would have accompanied such market penetration in the
Ongoing account monitoring and use of behavioral scoring by creditors to adjust credit
lines and take early preventive action...
References: Cole, R., "The importance of relationships to the availability of credit." Journal of Banking and Finance. 1998
Fisman, R., "Trade credit, financial intermediary development and industry growth." Journal of Finance. 2003
Kennickell, Arthur B., Martha Starr-McCluer, and Brian J. Surette, "Recent Changes in U.S. Family Finances: Results from the 1998 Survey of Consumer Finances," Federal Reserve Bulletin. January, 2000, pp 1-29.
Scott, J., "Small business and the value of community financial instituations." Journal of Financial Services Research. 2004
United States. Board of Governors of the Federal Reserve System. Federal Deposit Insurance Corporation. 10 Nov. 1999 http://www.federalreserve.gov/boarddocs/press/general/1999/19991110/default.HTM
United States. Federal Reserve Board. 10 Sept. 2003
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