Monday, July 5, 2010

5: Can Credit Consumers Survive the Credit Reporting Industry? Blog 5

(This is the fifth in a series of blogs about the credit and credit reporting industry in the United States.
The monthlynotesstaff intends to publish this series as a book. Book publishers, agents, and investors are encouraged to contact us to help secure funding for this project. Consider this to be material under copyright.)

What is the Alternative for the Subprime Credit Consumer?

What is the alternative for the subprime credit consumer? Take the more expensive money or opt out of the credit market and whatever it is the consumer seeks: apartment, home, car, business equipment or expense monies.

At this point, the concept of the "self-fulfilling prophecy" comes into play. The credit reporting errors and inaccuracies, never corrected, annotated, or deleted continue to increase the cost of the subprime consumer's credit. The subprime customer must pay higher finance charges or annual percentage rates (APRs) above the "best" credit customer rate to obtain credit.

Obviously, it is more difficult for the subprime customer to make larger and larger payments to pay the full balance on the credit card, mortgage, or other loan. It becomes more likely that the subprime consumer will at some point no longer be able to make payments. But the subprime consumer undoubtedly will continue to be billed with increasing finance charges and listed as an "asset" or "projected income" by a "bad paper" credit reporting based financial services company.

It would be more difficult for the "best" customer to pay the higher subprime interest and finance charges too. These larger finance charges likely would jeopardize the "best" customer's budget, lower the "best" customer's credit rating, and increase the "best" customer's interest and finance charges.

The subprime credit consumer has become the Subprime Investment Vehicle (SIV) of the consumer credit market. The subprime consumer actually finances the bank or lender by paying 5%, 10%, or whatever percentage above the "best" customer (APR). The subprime consumer takes less principal and pays more in interest and finance charges to make more money available to the lender to lend, particularly to the "best" consumer who receives more principal and pays less in interest and finance charges.

Despite the enormous contribution to the lending industry while still able to pay, the subprime customer is blamed for all the financial woes of the economy. This is particularly unfair to the subprime consumer in an economy sustaining itself with credit transactions in much weaker than hoped for financial and industrial sectors, in a significantly de-industrialized and increasingly "minimum-wage" retail and service based economy.

Of course like all financial vehicles, the subprime credit consumer can be grouped, combined, separated, re-grouped, bought, sold and traded. The subprime consumer becomes an item in yet another credit reporting related, credit-default, or other business at great cost to the financial present and future of the subprime credit consumer.

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