Is It Time to Take on Debt Again?

The loss that was suffered by many during the financial crisis has caused a lot of people to think twice about spending money they don’t actually have. Some consider this critical time in history a reason to drop their credit cards and other forms of so-called “good debt,” choosing instead to spend the money in their bank accounts using debit cards and old-fashioned, straight cash.

So now that the recession is officially over (at least on paper) and some say the economy is improving, albeit slowly, does this mean it’s safe to take on more credit and debt again?

Credit Cards, Mortgages and Other Debt Lost Their Appeal After the Recession

Prior to the recession and financial crisis, consumers were taking on forms of credit and debt in droves. People were buying houses, purchasing items on their credit cards and buying cars, largely because lending standards made it easy for just about anyone to be approved.

Subprime mortgages were among the popular types of loans acquired by consumers. Between 1999 and 2006, it is estimated the subprime mortgages jumped from a $160 billion to $600 billion industry. But of course, it is these mortgages that contributed largely to the crisis and resulted in widespread financial loss.

Credit card debt had a lesser effect on the economy as a whole, but did impact consumers individually. The Federal Reserve revealed in Oct. 2009 that consumers were dumping their credit cards and had cut their borrowing of this type by $11.8 billion because they were tired of increased rates and unfair fees from banks and credit card issuers.

According to a 2009 survey conducted by Consumer Reports, 32 percent of respondents paid off or closed their credit cards in the 18 months prior to avoid limit cuts, interest hikes and new charges. As noted by an Experian report, the adjustments made by cardholders attributed to the average number of cards held dropping 23 percent in 2010 to 1.97 cards per customer.

While some borrowers chose to walk away from their credit and loans, others were forced to do so. Some credit card issuers dropped their customers when the Credit CARD Act was enacted and many banks began tightening their standards as a result of Wall Street Reform.

Additionally, consumers struggled with job loss, foreclosure and bankruptcy and subsequently saw a drop in credit scores. By mid-2010, 25 percent of Americans were found to have a subprime credit score.

Whether by force or choice, many Americans left the world of credit and debt. But as many know, it’s very difficult to function within this society without borrowing to cover major purchases. So for those who did opt to take part in a cash-only lifestyle, does this mean it’s time to jump back on the credit/debt bandwagon?

Is It Time Acquire Credit and Debt Again?

In 2010, Ray Martin, a financial contributor for the CBS Early Show, said consumers should always have at least one credit card since it positively impacts your credit report and score. He feels credit repair and debt management are important and should be practiced as opposed to completely ignoring the system.

Of course, there are people who don’t want anything to do with credit after what they’ve endured over the past few years with creditors and lenders. However, for those who are thinking of joining the system again, one thing to consider is that reports show the Credit CARD Act making a positive difference.

According to the Center for Responsible Lending, card issuers have been doing a pretty good job of following the rules. As a result, cardholders have benefited in the following ways:

• Consistent interest rates: The report found that card issuers, with the exception of a few, have maintained interest rates that customers are comfortable with paying. And those that do choose to increase their rates provide cardholders with plenty of warning before doing so.
• Customers understand contracts more: Customers have a greater understanding of their contracts because issuers are taking time to make credit card statements more transparent.
• Charges are no longer hidden: As a result of more transparent contracts, customers know from the beginning what charges they may be required to pay so they won’t feel blind sighted by extra costs.

And as for personal and mortgage loans, a recent report from the Federal Reserve has revealed that banks are lending more today than they have in the past 17 years.

The climate for lending seems to have shifted a bit in favor of the borrower, which means this may be a better time to take on loans and credit than in the years past.

Factors to Consider Before Taking on New Credit and Debt

So the time has come for you to consider obtaining a new credit card, auto, personal or mortgage loan, or receive some other type of credit extension and you’re unsure of whether you should. Here’s what you should ask yourself”

• Why do you want the extra money? The first question to ask yourself before signing for a credit card or loan is why do you want the extra money? Are you trying to buy a house? Do you need a new car? Are you looking for the benefits a credit card brings? If you are borrowing money merely because a financial institution has offered, you may want to rethink this decision.
• Do you understand credit to debt ratios? If part of your strategy is to ensure your credit score is actually in good standing then you need to understand what a credit-debt ratio is and how it affects your score. This will help you determine how much money you should borrow and whether now is the time to borrow at all.
• Can you pay back the amount you borrow? If you take on a credit card or loan, do you have the income to actually pay back the amount you’ve borrowed? If you don’t know the answer to this question, you need to sit down and make a spending plan to ensure you can always pay your debts on time.

These are just a few considerations you could make as you think about taking on credit and debt again. The more you learn about these financial systems, the better your chances will be of managing them well if you decide to incorporate them into your life once again.