The Credit Divide

There is an emerging theme of the economic recovery in the United States: Americans are divided not by income or wealth but by their access to credit. Many people have been left with damaged credit as a result of plunging home prices, lost jobs, overspending, or bad luck. In the article “Fed Wrestles With How Best To Bridge U.S. Credit Divide,” The Wall Street Journal reported on the credit divide that is hobbling economic recovery.

In theory, the low interest rates we currently have should encourage household spending, business investment, and hiring, while reducing the burden of past debts. However, there is still a gap in who has access to credit. Banks remain reluctant to extend credit to households with any hint of financial problems. Many with lower incomes or blemished credit histories are finding it difficult and costly, and sometimes impossible, to refinance their mortgages or get new loans.

In addition, interest rates have fallen more for people with good credit than for people with bad credit. Interest rates on a 30 year mortgage for households with a credit score of 750 or higher are 3.53%, but for households with credit scores around 650 the interest rate is 4.04%.

Many people with good credit are taking advantage of this cheap money. But those who can afford to borrow money are not spending the money- they are investing it. Financially secure households can already consume as much as they want, so they are more likely to save or invest the money they borrow. As a result,  the low interest rates have not triggered broad waves of spending, refinancing, and new borrowing.

The following graphics come from the Wall Street Journal and illustrate the credit divide.

To read the full article, click here.

Let us know what you think about the credit divide. Have you struggled to borrow money because of it? What do you think will be the long term effects of the credit divide?