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Do Banks Give Credit Where Credit’s Needed?
- June 24, 2016
- CBR - Economics
Lending to the small spenders
Low interest rates and stimulus programs were supposed to get credit to people who would rev up the economy. But research suggests most of the additional credit went to people who needed it least, and for whom it had the smallest impact on spending.
While access to more credit led to higher levels of borrowing across the board, households with lower FICO scores increased their borrowing by a larger margin and retained their debt over a longer period of time. These lower-score borrowers likely used the boost in credit for immediate spending, and then carried the debt forward, paying it down gradually.
Many of those with higher credit scores, on the other hand, took advantage of 0 percent introductory interest offers to buy one-time, big-ticket items, quickly paying down the debt by the time teaser rates expired. The most-creditworthy consumers simply shifted debt around opportunistically between cards without taking on new debt. These consumers weren’t motivated to borrow by the offer of additional credit, since they weren’t credit constrained in the first place.
While noting that their study does not evaluate the longer-term social impact of higher leverage for low FICO score households, the researchers conclude that “bank-mediated stimulus will only raise aggregate borrowing if credit expansions are passed through to low FICO score households.”
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