Dump the Deadbeats
08/04/2010 12:00 pm EST
Liz Pulliam Weston of MSN Money says people have to learn the hard way how to live within their means.
Clearly, credit properly used can transform lives. But credit too freely given nearly wrecked our economy.
Unaffordable mortgages plus soaring unemployment have led to a raft of credit ills.
As a result, 26% of Americans with active credit accounts have credit scores of 599 or below, too low to qualify for most mainstream lending. That compares with 15% pre-recession.
In all, nearly 18 million people have joined the ranks of the credit pariahs since the recession began.
These folks will pay much higher interest rates for loans, if they can get them at all. They typically will: pay more for insurance; have trouble getting apartments; have to make large deposits to get utility services, [and] have trouble getting cell phone contracts.
So, are the people with sub-600 scores paying too high a price for a crisis that was beyond their control?
I think not. Cutting people off from credit when they fall below certain scores isn't unfair. It simply reflects the reality that they were given credit and bungled it.
Some people can't handle credit—period. Not everyone is financially stable enough, or responsible enough, for a mortgage. But lenders ignored that in their rush to make loans they could then sell to Wall Street investors. Borrowers ignored it, too, in their haste to buy into rising home prices.
Some sanity has returned to the mortgage markets since the crash. The most toxic mortgages have disappeared, at least for now. Lenders actually make sure the income borrowers report matches what's on their tax returns.
Anyone who has a reasonably stable income can, over time, save enough money and rebuild his or her credit scores to the point where homeownership makes sense.
But not everyone will. And those who can't or won't make the effort shouldn't get the loan.
The same is true of credit cards. About a quarter of US households don't have credit cards, 30% pay their balances in full, and half who do carry balances owe $3,000 or less. But we all know people who get in deep trouble because they use plastic to live well beyond their means.
These people were aided and abetted by a lending system that did not care if they could pay back what they borrowed as long as their debt could be packaged and sold to investors.
Those days have ended, fortunately: It’s harder to get a credit card these days. Many people trying to rebuild their credit will have to start with secured cards, which require a deposit of at least $200.
And that's not a terrible thing. Having to scrape together some savings, and spend several months or even a few years learning to live within your means is not a hardship. For most of our history, that was how you earned the right to get credit.