Consumer credit Flashcards
Why is there more consumer credit?
- consumer credit has replaced corporate lending as a source of profit for banks because corporations increasingly seek money from financial markets instead of banks
- deregulation of interest rates in some places allowed lenders to charge higher rates for profit
- tech changes have allowed gathering and management of credit data
What is the social reason consumers borrow more?
- feel they need to spend to “keep up” with others.
- they borrow to purchase the things they believe they need.
- modern consumer culture promotes competitive spending on “positional goods” that convey one’s social status to others
What is the economic reason consumers borrow more?
- consumers simply taking advantage of cheap credit to increase their assets
- people are rationally using credit to accumulate wealth
What is the political-economic reason consumers borrow more?
- shrinking of the welfare state from the 80s in particular, and rise of neoliberal economic policies that advocate (“free”) market mechanisms over state interventions
- Means people must increasingly rely on credit to purchase things that were once subsidized by the state (education, etc.)
Why is it difficult to establish a clear relationship between welfare states and rates of household debt?
- in some places, a weak welfare state forces some people to take on more debt to get by, in other places, makes people afraid to take on debt.
- In some places a strong welfare state could remove the need to borrow, but in other contexts could make people feel secure and willing to take on more debt
What’s an example of the difficult relationship between welfare states and household debts?
Finland: strong welfare state; increase in household borrowing
Russia: weak welfare state; low levels of borrowing
Name the 2 types of consumer debt?
- Formal debt
- Informal debt
What is formal debt?
either mainstream lenders (banks and credit unions) or “fringe” lenders (like payday lenders or other high-interest lenders).
What is informal debt?
- involves borrowing money from family/friends
- not recorded or measured, even though it’s common.
- Informal debt can be “fringe”: “loan sharks”
What are loan sharks?
informal lenders who lend money at very high rates of interest and may resort to violence if their money isn’t paid back
Where does the growth for consumer credit worldwide take place?
Formal market
What are the tiers within the formal market?
- not just a distinction between mainstream and marginal forms of credit, but also within mainstream credit markets
- borrowers are offered different borrowing terms
- different interest rates,
- access to different types and amounts of credit.
What is a credit score?
- a three-digit number that comes from the information in your credit report. It shows how well you manage credit and how risky it would be for a lender to lend you money.
- how it’s calculated considered proprietary info
What is a credit bureau?
the data they collect comes from lenders (banks, credit card companies, and others) who share information with credit bureaus about their clients and those clients’ borrowing and spending behaviours
Where did credit scores originate?
- modern credit scoring began in economic transformations in the US in late 19th- early 20th centuries and originates in retail sector.
- As retailers and their markets grew, it became difficult to determine who could be trusted to purchase items on credit.
- Store credit was once a personal and local affair –> needed to be de-personalized and bureaucratized > emergence of early credit bureaus
- by 30s: point based system for credit worthiness
