Current Situation on the Consumer Credit Market in the U.S - Term Paper Example

Current consumer credit, how it has been affected from the economic downturn The 2008-09 financial crises have drowned the world economy in utter darkness making it really difficult to recover. The noticeable feature during that time was widespread unemployment leading to decreased standard of living. This lowered demand which in turn led to production cuts. Consumers are still cutting down on their costs of living but at the same time increasing credit purchases. This is because they have less owing to reduced income. This is evident from the rise in credit card debts in recent times. Credits are now available largely for people with sensible spending patterns. With debts clearly on the rising side it is a matter of concern for the federal government (White). In the scenario of post crisis there is less availability of consumer credit although in recent times banks have started giving educational loans (Jones). Besides, demand for such consumer credit has also lowered (Kapner). The essay intends to address this issue through appropriate current findings. Consumer purchases Consumer purchases just like the entire consumer behavior, is a complex one. Businesses as well as academicians have been focusing on this behavioral pattern for quite some time. Business houses obviously look upon consumers as the major source of earnings. For this purpose the department of marketing has been focusing on consumer’s preferences in order to know the consumer’s pattern of purchase (Credit Crunch and Financial Crisis effect on Consumer Buying Behaviour). In the post crisis situation the business houses also need to have fair knowledge of consumer’s income. In the post crisis situation where most countries are still recovering from economic downturn, consumers are experiencing low disposable income. The effects of credit crunch of 2007 fails to die down as organizations may not be able to finance sufficient credit and this is likely to have an effect on consumer credit (Credit Crunch and Financial Crisis effect on Consumer Buying Behaviour). As per current data consumers cannot even afford medical care and are continuously cutting down on health care products. Prescriptions have reduced to a record low of 0.5%. People cannot even afford to save their mediclaims and health plans. Several insurances have been cancelled for not paying monthly premiums. People are having less money post crisis and hence making mostly credit purchases from retails. The joblessness has lead to such a bad condition those they even fail to pay their grocery mortgages (Fuhrmans). Consumer credit post crisis Clearly after the global financial crisis US economy has suffered a loss in mortgage markets. The credit situation has been deeply influenced by financial crisis. Bad debts as a result of easy availability of credits have culminated into a crisis. Financial crisis was just an outcome of accumulating debt. Efficient monitoring was not done while lending loans. The rising tide of bad debt has forced the banks to stop supply of loans. They had become panic stricken. With low bank capital there has been a massive decline in bank lending. In the post crisis situation consumers are paying for the crisis in the form of taxes (Kilmister). Truly enough the impact of financial crisis has fallen badly on consumers. The situation has become so bad that people are getting much less salaries and debits cards have also become chargeable which is losing its attraction. In such a situation some companies in America are trying hard to acquire new customers for credit cards. However unlike pre crisis they are not becoming reckless with customer selection. This time the companies are ensuring that cards are given only to customers with a sound financial position. But even with attractive offers customers are reluctant to assume the burden of new debts. Clearly for consumer credit has lowered (Kapner).On one hand the consumer credit rates have increased and on the other there is a possibility for more taxes in future in order to finance bailout packages. The banks post crisis is seen as a device which is transforming societal wealth into funds for the richer classes (Taibbi). In recent times the consumers have concentrated more on savings. They are spending less and saving more. Savings rate have rose from 1.5 to 3% in the period of 2007-08. Moreover the credit supply from banks and other financial institutes have reduced considered. Limited availability of credit coupled with increased savings is having a detrimental effect on American wealth (Duca). More Savings and less demand for consumer credit post crisis During the economic times in 2005 consumer spending was at such a rate that savings had landed on zero. Post crisis consumers are increasing their savings rate. Although still much in wide usage consumers are trying to make less use of credit cards. Where savings has reached a 40 year high of 6.09% consumer credit is expected to decline more. The reason for declining consumer credit is directly related to huge number of default. The default for the year 2009 was computed as 8 percent. Besides demand for consumer credit has also lowered since they are concentrating more on savings. However the greater propensity to save will have a negative effect on the economy under the current situation. It will have a detoriating effect on recovery efforts of the economy. This is because with the ongoing savings rate consumers will be spending less. Consumer spending gives 70 percent financial revenue to the US economy. Mortgage crisis have developed a fear among consumers who fear from further borrowing (More Savings, Less Plastic: Consumer Credit after the Crisis). However the data collected for the current shows that consumer borrowings have increased compared to the previous year. This is true for non-revolving but not for revolving credit. Slight increase in banking capital or excessive use of credit cards can be a possible reason for this. The data is shown in the diagrammatic representation below: Figure 1: Column Chart showing consumer credit rise in 2011 Source: G.19 Consumer Credit Thus we see in the diagram above that non revolving credit has shown a hike but revolving credit has declined a bit. Overall consumer credit has expanded due to total increase. Consumer credit has expanded to $ 2.452 trillion. Few months back it had fallen by $ 9.68 billion. But again it has increased again by $7.39 billion. The hike is mainly due to recent lending of student loans (Jones). Conclusion Financial crisis and the credit crunch of 2007 was an outcome of huge debt and liquidity freeze. Careless lending had led to such situation. Post crisis availability of consumer credit has been quite low due to less bank capital and inability of other financial institutions to lend. Moreover these organizations have also stopped lending customers due to fear of high defaults. This has mainly increased usage of credit cards because people have less cash. Moreover demand for consumer credit is also quite low since people are concentrating more on savings. This has proved bad for country’s wealth. In recent times banks have made some recovery and lending is again taking place. They are mainly supplying student loans. Hence consumer credit has expanded recently although not to the extent of pre crisis, after suffering a fall just few months back. References: 1. Credit Crunch and Financial Crisis effect on Consumer Buying Behaviour : Sample 25, Ivory Research, 2009, December 16, 2011 from: http://www.ivoryresearch.com/sample25.php 2. Duca, John V. The Financial Crisis and Consumption, 2009, December 16, 2011 from: http://www.fmpm.ch/docs/13th/papers/B1d.pdf 3. Fuhrmans, Vanessa. Consumers Cut Health Spending, As Economic Downturn Takes Toll, WallStreet Journal, 2008, December 16, 2011 from: http://online.wsj.com/article/SB122204987056661845.html 4. G.19 Consumer Credit, Federal Reserve Statistical Release, 2011, December 17, 2011 from: http://www.federalreserve.gov/releases/g19/Current/ 5. Jones, Dow. UPDATE: Student Loans Push $7.39B Consumer Credit Expansion, Wallstreet Journal, 2011, December 17, 2011 from: http://online.wsj.com/article/BT-CO-20111107-716090.html 6. Kapner, Suzzane. Debit or Credit? Citi Places its Bet, WallStreet Journal, 2011, December 17, 2011 from: http://online.wsj.com/article/SB10001424053111903374004576581084218444302.html 7. Kilmister, Andy. The Economic Crisis and its Effects, IV Online Magazine, 2008, December 16, 2011 from http://www.internationalviewpoint.org/spip.php?article1581 8. More Savings, Less Plastic: Consumer Credit after the Crisis, knowledge @wharton, 2009, December 16, 2011 from: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2281 9. Taibbi, Matt. The Great American Bubble Machine, rollingstone, 2010, December 16, 2011 from: http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405 10. White, Martha C. $54 Billion Closer to Our Next Financial Crisis, Time Moneyland, 2011, December 16, 2011 from : http://moneyland.time.com/2011/09/14/54-billion-closer-to-our-next-financial-crisis/ Read More