Wheatworks Blog: Financial Matters

“Tighter credit”, is a phrase we hear in the news almost daily. And we hear references to the “credit squeeze” and “raising the bar for borrowers”. But what do these words mean in practical terms?

The credit squeeze is a real factor in our economy. Easy credit has been available for more than 10 years and it is disappearing.

Examples of easy credit include car dealer phrases like, “Bad credit? No credit? No problem! Drive off in a new car today!”

Interest rates have been low during the last decade which makes money cheaper and easier to obtain.

Another example of loose lending is that banks made it too easy to borrow money for houses. If you are old enough, you remember the time in our nation’s recent history when buying a home or refinancing one required significant effort. One had to prove his or her income for a period of time, share information about assets and liabilities, maintain a healthy debt level and meet underwriting standards that most financial institutions threw away during the last decade.

Tighter credit is the opposite of our last decade.

Lenders are scared of what our financial future holds and are making it more difficult (though some say “appropriately difficult”) to borrow money. Banks are no longer throwing money at you when you walk in their door and ask for it. Mortgage companies want proof (think IRS tax return-type proof) of your income and financial stability.

Another example of the credit crunch is that credit card companies are lowering the maximum credit limits for customers and interest rates are rising on credit cards.

Small and mid-sized businesses that frequently borrow money for operations may find it difficult to borrow money. And a business that cannot support its operation cannot continue in business.

Because consumers (you and me) are growing concerned about our collective financial future, we’re less likely to purchase a car in a way that gives the dealer a large profit. That hurts the dealer’s business. He makes a smaller profit (or no profit) and goes out of business.

As you can see, all the aspects of our economy are related to each other. You may have a perfectly affordable mortgage which you’ve paid flawlessly and have money left over each month for savings. However, because the different parts and pieces of our economy are connected, what greedy housing speculators have done with funny money loans and what greed on Wall Street has done to investment banks will have an impact on your financial life … at least a $700,000,000,000.00 impact on your financial future.

Additional Reading

The New York Times has an excellent article titled, “Pain Spreads as Credit Vise Grows Tighter“