The paradox of borrowing money

We live in a credit driven society where access to loans has become synonymous with wealth accumulation and success. One example is the benefit associated with homeownership compared to renting. It is an established fact that entering the real estate market is one of the fastest routes to building wealth.

This illustrates the importance of lending, and the effect it has on people from all walks of life. Yet, the picture is complicated by banking requirements and credit bureaus that collect information about consumers on a regular (and often involuntary) basis.

You gotta lend money to get another loan

An interesting paradox has occurred in western economies, as credit is given on a discretionary basis. The main parameter used in the decision process is whether the debtor has repaid previous loans in accordance with the loan agreement. In other words it has become necessary to take out loans in order to get new ones.

Most of us end up getting a credit card, shortly after turning 18. Charging smaller amounts, which is then repaid can be viewed as a safe way of establishing a good credit score. It requires a certain amount of self control to avoid emptying the card, and the banks are perfectly aware of this.

Some areas are being improved

With the advent of online borrowing, there have been certain improvements seen from a debtor’s perspective. Comparison services have sprung up online, where they specialize on information exchange. This in turn drives more consumers to their websites and generates lead revenue. One such service is Nerdwallet.com, which has become one the most popular personal finance websites in the U.S.

Similar developments are taking place across the pond in European nations. Many web portals, including the Norwegian lending promoter Lånius.no have managed to increase their revenue by offering financial advice to their visitors.

The lending business is therefore becoming “flatter”, in the sense that private consumers are getting easier access to information about each lender and their rates.

The spread of information has undoubtedly lead to increased competition, which benefits the end-consumer. However, it doesn’t change the fact that access to loans is restricted by an individual’s credit history.

How can the system be improved?

The recent Equifax hack made it clear that credit card agencies are in need of a legal overhaul. These agencies hold enormous power over ordinary citizens, which needs to be scaled back. Of special concern is their method of collecting, storing and sharing credit information about consumers.

One solution is to mirror the European practice, where governments take charge of storing financial information about its citizens. Such changes would make sense both from a safety standpoint, and out of mere practicality. However, it remains to see whether common sense can prevail over the powerful lobby of the credit bureaus.