@Anonymous wrote:Something that I think we are going to see much more in the future is the amount of credit relative to the assets a person has and the capacity to pay off the debt.
Income can often be skewed, as I know many Doctors, making $250,000 a year plus and they are leveraged to the max. They are not in as good as financial position as a single person, making $35,000 a year, carrying no debt.
If income was the only criteria, I doubt we would have the limits we do. Last year, counting retirement/consulting fees, rental income, etc, our income was $91,000. Now we have 4 credit cards, with total CL's of $95,000.
Then again, we carry no debt. Our 3 rental properties are owned free and clear, as is our primary residence, our vehicles and we have a few pennies in CD,s, so that is probably what drives people to continually offer us HIGHER CL"s, new credit products ,etc. Luckily, we have no desire or need for them and turn them down.
As I say, I think this will be the new model Banks start using, as it indeed shows a better picture of a persons financial position then just an income number or a credit score. That is the model that has been used for years in the gaming industry and since their losses are so much smaller then the banks have experienced, they will adopt it.
Yep, in the good 'ole "4 C's" days, that was the case. Now leverage and "cash flow" is what the market in general looks at. Even stocks are priced as a multiple of earnings, and some companies trade at a crazy level (100x earnings and more at times). This means that the price of the stock is actually a bet on the future earnings, and has nothing to do with real income and assets.
Credit is priced similarly these days. Many markets price products by "monthly payments" or "what can you afford per month" rather than as a fixed price. So, if the consumer appears to be able to pay through cash flow, they get credit. This is a multiple of future earnings. Some have a multiple of 1 or less. Some have a multiple of more than 1 (like the person with $70k but $250k in CCC's, plus auto, plus mortgage, etc.)
The markets see consumers not only in terms of current assets and income, but future assets and income....thus the very term of "credit risk" is associated not with a persons ability to liquidate debt, but the likelihood they will fall behind in payments (90 days or more).
Consumers purchased and held property on the faith it would continually go up in value giving them a fixed asset with growing value and a source of "equity" that could be tapped. Lenders lent to consumers expecting their incomes and assets (as a whole) to increase, thus allowing for more leveraging of debt now, to be covered by future increases in income and assets, not just current balance sheets.
Anyway, I think we are going to see some of the "4 C's" coming into play moreso now and for the near future. But I don't think this will be long lived. I think that once things appear to have turned around, there will be those in political and financial and consumer markets that want to see the "good times" role again focusing solely on the short term gains.....no long term vision.
IMO 