Monday, March 30, 2009

In And Of Itself, Credit Is NOT A Bad Thing

I've been reading alot of things recently suggesting that financially strapped consumers would be better off without access to credit. This is a common and, frankly, dangerous fallacy in the century-old litany of complaints about consumer debt. The problem is not credit. It is poverty. If you don’t have money to get your car fixed or pay your doctor, even high-priced credit is very welcome. Many of the things I read highlight the plight of poor, or lower-income people. So let's talk about that. The forms of credit traditionally used by lower-income people—pawnshops, rent-to-own stores, and loans from friends and family—do not show up in aggregate statistics on consumers’ savings or debt.

Credit-card prices used to be “high and simple,” with everyone paying the same, regardless of credit risk. Now people who reliably pay their bills no longer cross-subsidize higher-risk customers—which arguably makes pricing fairer—and people who used to be too risky for standard pricing can get credit cards. But the fees and interest rates that many complain about are one result. They represent the real cost of making those loans. As we’ve recently learned from the mortgage market, underpriced credit can prove terribly expensive in the long run.

The best argument against consumer credit is that its easy availability tempts people into buying things they later regret, not that credit-card companies make profits by lending to risky borrowers who need their services. The latter complaint is just a 21st-century form of the ancient attack on money lending.

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