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Decades of making money cheap, easy to print, and similarly easy to loan out have resulted in a large number of Americans struggling under a huge debt burden. The banks which have lent out this money are now restricting credit to borrowers, despite their creditworthiness, and actually damaging peoples’ credit histories for no rational reason.

Instead of saving money to purchase a car or home, for years it was easier just to borrow the money from a lender. Giant companies like General Motors and General Electric established finance divisions to sell losing assets at a gain through the availability of loans and interest payments. But these days are over and the so-called credit crisis is here.

In response to the larger than average number of homeowners and consumers defaulting on their debts, facing foreclosure, or not paying their credit cards, issuers of lines of credit are not cutting back on those lines. This action, though, is having the opposite effect that every other government and bank plan is purported to have: freeing up credit to consumers.

In fact, the banks are begging for and receiving hundreds of billions of dollars to unfreeze their consumer lending divisions, even as they are cutting back the amount of money being offered to consumers who already have loans. The effect is that people who were once creditworthy are being hit on their credit scores.

One small part of the subprime mortgage crisis and foreclosure crisis in general was that lenders, during the boom years, did not worry about credit scores or incomes. House prices were always rising, so anyone could be given a home loan, and even if they could not pay it back, they could just sell at a gain and pay back the mortgage company.

But that era ended when house values began to fall as a result of fewer loans being made to bad borrowers and more foreclosures as a result of bad loans. There are no more Alt-A Option Adjustable Rate Stated-or-No Documentation Pay-If-You-Want-Sell-If-You-Don’t Mortgages available from hundreds of lenders.

Credit scores are beginning to mean something again for prospective borrowers and lenders, and a good credit score and an on-time payment history will be just as important as having a down payment to obtain a loan. But this is exactly what the banks are now sabotaging in their misguided efforts to reduce risk.

The banks are actually lowering credit limits for consumers based on risk-assessment algorithms, which are supposed to predict which borrowers are at a higher risk of default. This is despite the fact that some of these borrowers may have already-high credit scores and no late payments on these lines of credit.

One impact of this will be lowered credit ratings for borrowers who are paying off their loans on time every month. Despite their wise use of credit, if they spend a little too much like an at-risk consumer, they may find that the lender has lowered the amount they can borrow and given them a hit on their credit report.

Increased credit limits will invariably raise a credit score, all else being equal. On the flip side, lowering credit limits decreases consumers’ credit scores. If these people ever do face a financial hardship, even their on-time payment histories may prevent them qualifying for a foreclosure refinance or other program.

The bottom line: banks are destroying consumers’ credit scores by lowering their credit limits, despite their on-time payment history. If these borrowers ever experience a financial hardship, they will be unable to qualify for a refinance (despite being creditworthy) from their bank (which destroyed their credit) or any other (which relies on their destroyed credit rating).

But — the government and the banks are working together to take trillions of dollars and unfreeze the consumer credit markets?

Author: Nick Adama
Article Source: EzineArticles.com
Provided by: Canada duty rates

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