A Brief Overview of Bank Lending Practices and Credit Counseling

The concept of credit counseling in the 1950’s was far removed from mainstream America.  Consumers simply purchased goods according to their liquidity.  People used to live within their means.  Homes and cars were purchased on credit only available to those who could demonstrate a clear ability to pay by taking work history, job security and level of education into account.  Credit references were thoroughly checked.

The evolution of banking in the post Vietnam era changed everything in America from population to landscape.  Lenders slowly came to the understanding that the breakeven point between indiscriminate credit granting and operating at net loss would almost certainly never be reached.  In plain English, it made sense to lend to the masses and liberalize lending practices because income would be limitless. 

This realization gave way to branch banking and the emergence of several large powerful corporations in the 80’s and 90’s.  In this period of economic expansion, Americans became infected with a type of euphoria fueled by a social philosophy of instant gratification.  The banks relied on this mentality and commercialism to power their engines.  

It seems odd that the very institutions granting you credit at high interest rates would agree to interest rate reduction, take in less income and negotiate with third parties on your behalf.  However, this is exactly what credit counseling agencies can achieve for consumers with high debt to income ratios and high interest credit card debt.  Aside from the considerable tax deduction benefit enjoyed by lenders who partially fund the non-profit credit counseling agencies, you may be wondering how and why this is possible. 

The number of bankruptcy filings in the United States has swelled from just under 300,000 in 1980 to over 1.6 million in 2002.  Banks have been forced to enter a new era of social economic responsibility.  It has become evident that American consumers cannot afford to live on high interest rate credit.  It is preferable for lenders to receive all principal and some portion of interest rather than the alternatives.  Bankruptcy and debt settlement or debt negotiation are greeted with greater resistance than credit counseling and for obvious reasons. 

In the advent of bankruptcy reform, it appears that this remedy will not be as readily available to American consumers.  Banks are urging the political machine to enact bankruptcy reform and to put mandatory steps into place prior to allowing individuals to file.  One of those proposed steps is credit counseling because of its’ proven ability to provide debt relief without causing economic devastation to lenders.  

Stay informed.  The largest debt you owe is to yourself.  

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