Equifax

Finance Blog

Consumers Need to Limit Debt Because Creditors Won’t Do It For You

Written by Liz Weston on March 28, 2011 in Credit  |   No comments

Consumers Need to Limit Debt Because Creditors Won’t Do It For You Adapted from The 10 Commandments of Money by Liz Weston Compared to previous generations, we have a lot more debt—and a lot more trouble paying that debt. By every measure, from household debt…

Consumers Need to Limit Debt Because Creditors Won’t Do It For You
Adapted from The 10 Commandments of Money by Liz Weston

Compared to previous generations, we have a lot more debt—and a lot more trouble paying that debt. By every measure, from household debt loads to bankruptcy rates, debt is a much bigger problem than in the past.
You might be tempted to conclude that earlier generations were better able to handle temptation or had higher moral standards about repaying the debt they accumulated.
But the reality is that until recently, people had far fewer opportunities to get into serious debt than those in previous generations.
Credit card issuers were emboldened by two developments:
The FICO credit scoring system, which allowed lenders to better predict the risk that a borrower would default—and to change their interest rates and terms based on those risks.
Loan securitization, where issuers began packaging up debt into securities that could be sold, shifting the risk of losses from the issuing bank to investors.
As a result, credit card issuers began offering cards to more and more people, including those with more troubled credit histories.
A similar loosening of standards occurred with other forms of debt including auto loans, where negative equity lending became prevalent, and home loans. Instead of the thirty-year, fixed-rate loan that was standard until the 1980s, borrowers could choose adjustable-rate loans, hybrid loans (fixed for a few years before becoming variable), interest-only loans and loans with variable payments that sometimes didn’t cover all the interest owed, let alone touch the principal (often called “option ARMs” or “pick-a-pay” mortgages).
Lenders’ excesses came back to haunt them, of course. Defaults and foreclosures started to climb. Insurance contracts and investment derivatives based on these faulty loans caused Wall Street firms to suffer massive losses, requiring bailouts, takeovers and bankruptcy filings.
Our economy edged away from the brink, and lenders trimmed their sails considerably. Lenders’ caution is likely to persist—at least until the next boom.
But even now, it’s still easy to get in over your head, particularly if you have good credit. Negative-equity auto loans are still abundant. Credit card issuers continue to brawl over prime customers, and you can qualify for multiple credit cards with limits that exceed your annual income. You can buy a home with as little as 3.5 percent down with no requirement that you have any other savings once the deal closes.
So the moral of this story is that we as individuals need to put our own limits on how much we borrow. Unlike previous generations, we can’t count on lenders to set those limits for us.
Adapted from The 10 Commandments of Money by Liz Weston

Liz Weston is the most-read personal finance columnist on the Internet, according to Nielsen//NetRatings. She’s an award-winning, nationally-syndicated personal finance columnist who can make the most complex money topics understandable to the average reader.

The New York Times called her latest book, “The 10 Commandments of Money: Survive and Thrive in the New Economy,” a “wonderful basic personal finance book…[with] enough counterintuitive ideas to keep even people who know a bit about personal finance reading further.” Her earlier book, “Your Credit Score: Your Money and What’s at Stake; How to Improve the 3-Digit Number that Shapes Your Financial Future,” is a national best-seller and was recently published in a third edition.

Liz’s columns run twice a week on MSN Money while her question-and-answer column “Money Talk” appears in newspapers throughout the country, including the Los Angeles Times, the Palm Beach Post, the Portland Oregonian, Stars & Stripes and others.
She also writes a money column, “My Two Cents,” for AARP the Magazine, the largest-circulation magazine in the world with 22 million subscribers.

No comments yet


Leave a Comment


Name :


Commenting guidelines

We welcome your interest and participation on this forum, but be aware that comments will be published at Equifax's sole discretion. Please don't use this blog to submit questions or concerns about your Equifax credit report or raise customer service issues. Instead, you should contact Equifax directly for all such matters and any attempts to do so in this forum will be promptly re-directed.

Some other factors to consider when commenting:
  1. Registration and privacy. While no registration is required to visit our forum, participants wishing to post a message must register by creating an account. All personal information provided by forum members incident to registration is governed by our Terms of Use and Privacy Policy.
  2. All comments are anonymous. We'll delete your name, e-mail address, and any other identifying information, including details about your investments.
  3. We can't post or respond to every comment - As much as we'd like to, we can't post every comment, nor can we guarantee that we will respond to each individual message. All questions or comments about your Equifax credit report or similar customer service issues should be handled by contacting Equifax directly.
  4. Don't offer specific legal, tax or financial advice. All of the materials on this Site are for information, education, and noncommercial purposes only and this forum is not intended as a means of expressing views or ideas regarding any specific legal, tax, or investment advice. While offering general rules of thumb is both permitted and encouraged, recommending specific ideas or strategies regarding investments, taxes, and related matters is prohibited.
  5. Credit Repair. This blog is not intended as a venue for the discussion or exchange of ideas regarding credit repair or other strategies intended to assist visitors and community members improve or otherwise modify their credit histories, ratings or scores.
  6. Stay on topic. Your comment should be concise and pertain to the specific post in question.
  7. Be respectful of the community. The use of profanity, offensive language, spam, and personal attacks will not be tolerated and egregious or repeat offenders will be banned from future participation. We encourage disagreement and healthy debate, but please refrain from personal attacks on our WordPresss and contributors.
  8. Finally: Participation in this forum may be terminated by Equifax immediately and without notice for failure to comply with any guidelines or Terms of Use. As such, you should familiarize yourself with all pertinent requirements prior to submitting any response through the blog or otherwise. All opinions expressed in this forum are solely those of the individual submitting the comment, and don't necessarily represent the views of Equifax or its management.

Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.


Stay Informed Sign up for our FREE Equifax email Newsletter