The days of the credit score may be numbered. That is not to say it will happen tomorrow, next month, or next year. But, there is a possibility that it will come before you retire, before your kids are grown, or when you need regular medical care.
Throughout history, banking panics, crises, and failures have resulted in extended periods of reduced economic activity. During the past 100 years, this was often very localized, with certain areas being devastated while others left relatively untouched. Whether it was the Great Depression or the stagflation of the 1970s/1980s, the United States always had areas that were not as affected by the economic disruption.
How Did We Get Here?
After World War 2, the United States was in a unique position to benefit from the devastation of Europe, Japan, and Soviet Russia. It was a time where the country was the only industrial power able to produce the manufactured goods the world so desperately needed. While the rest of the world rebuilt itself, the United States companies supplied the materials and goods to get them back on their feet.
By 1970, the rest of the world had caught up to the United States. The country no longer had any competitive advantage and factories and plants began closing all over the country. Former industrial cities like Chattanooga, Cleveland, St. Louis, Baltimore, Detroit, Gary, and Flint began their slow descent into de-industrialization.
The Bank Economy.
As the producing power of the country declined, its financial power increased. The banks and financial industry began to take a more prominent role in the economy. With this, came increased access to credit and the demand for credit services to determine the creditworthiness of borrowers. The 1980s saw the rise of the credit score!
In an economy defined by one’s ability to borrow, rather than one’s ability to produce, a credit score takes on an importance not seen before in United States history. Where borrowing was limited to production activities and land, now borrowing includes entertainment and leisure, shopping at the mall, college, home equity loans, and even plastic surgery!
Have Debit Cards Tipped The Scale?
The availability of debt for discretionary, luxury, and personal expenses has created a tremendous demand for credit reporting services. The banks and other lenders rely on these scores to basically determine what standard of living you can expect to have. As mentioned before, it is unprecedented for lenders to have this much impact on the lives of an average American.
Once the debit card became available, it may have signalled a tipping point for credit availability in this country. Since the debit card is still a credit card (since it is drawing from the accounts of Mastercard or Visa and not directly from yours) and basically anyone with a checking account can get one, credit has extended to just about every aspect of daily life. This can not last.
Credit Scores Will Be Meaningless.
With so many relying on credit (credit & debit cards) to get through their day, they are extremely vulnerable to changes to their credit score. However, cedit scores, and ultimately lending, were never intended to be used to buy groceries, a movie ticket, or a new dress. It is intended for production (farming, manufacturing, trade) or land.
With such a misallocation of credit, it is inevitable that this current financial situation will end. Credit will become much harder to get and will be restricted to very specific purposes. In that environment, the credit score will be useless for many types of loans you take for granted today. This is certainly true if you don’t have any assets or collateral to secure it.
Use That Credit Score While You Can!
To avoid being caught when the credit score becomes less important in lending, first be sure that your ability to borrow today is not impeded. Check your credit reports and make sure to remove anything that is not appropriate. Do this while you still can.
Second, learn to avoid going into debt for food, clothing, fuel, and the other necessities of life. Credit should be reserved for very specific circumstances, such as a business or land purchase.
Third, when you do use credit be sure to use it for durable and long lasting purchases. For instance, a stove, refrigerator, or washing machine are good examples of long-term purchases that can be justified by debt.
Lastly, use the credit you have. It makes no sense hoarding credit lines or open accounts if you have no plan to use them. More than likely, when the time comes when you really need them, they will not be available. So, use it or lose it, because you will lose it eventually whether your credit score was good or not once the banks and financial institutions end this era of easy credit.
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