Higher Interest Rates Because I Have Bad Credit? Not Fair
You might be thinking that it is not fair that you have to pay higher interest rates just because you have bad credit. In actuality, it really has nothing to do with fair or unfair, it is simply businesses hedging against loss because they are dealing with high-risk borrowers. Let's face it, regardless of the reason why you have bad credit, the point is..you have bad credit and therefore lending you money become a high risk investment. There is a greater likelihood that a loan will default or a borrower will skip out without paying his debt if the borrower has bad credit. Therefore, in order to protect against loss, high risk lenders who do lend to high risk borrowers, lend at a higher interest rate. To understand it further, you really have to understand how the credit system works.
The History Of The Credit System And Credit Reporting
Before World War II, consumers and creditors worked together directly. Consumers would get credit from retailers just like buy now pay later catalogs do today. The customer and the store or creditor would establish a relationship with each other over time and therefore establish a relationship of trust. There was not a national or nationwide credit reporting system before World War II. After World War II, small credit reporting establishments in the United States came together to start an association that shared consumer credit information with each other.
When this association started, it was only to convey information from those consumers who did not pay their bills. As time went on, they began to share other consumer information. As the economy got stronger after World War II, banks started to get into the credit lending business, and virtually took over that position which was once held by store merchants. As consumers began to travel, banks developed cards (credit cards) that consumers could use anywhere.
With the use of computers, the consumer credit information sector grew by leaps and bounds with the creation of three nationally recognized credit reporting agencies by the 1980's. Those credit reporting agencies are Experian, Equifax and Transunion.
So essentially, banks and financial institutions took over something that was done privately between consumer and merchant as the country grew and customers became more mobile.
The Financial Institution and The Interest Rate
Usually, when you dealt directly with a store or a merchant, there was little interest if any at all. However, after the banking institutions took over the whole lending and credit industry, charging interest became the way the made money on the money that they lend to you through loans or credit cards, mortgages or student loans. The higher the interest rate they charge, the more money they make. When you pay your bill, the interest gets paid first and then whatever is left goes on your principal balance. This is why it make take decades to pay off a small $5000 loan.
When the credit reporting systems and the financial lending institutions married, the financial lending institutions began to charge higher interest to those borrowers who were more risky or those who did not pay their bills on time or at all. They rewarded borrowers who paid their bills on time with a lower interest rate. So therefore, if you are a higher risk to banks for not paying your bills based on your credit payment history they either don't deal with you at all or give you a loan at a much higher interest rate. Some interest rates border on what is called "legal loansharking."
During the financial crunch of 2008, many banks started to raise the interest rates even for borrowers who had perfect payment history. This is because they needed to make more money to pay off debt or to get themselves out of a financial bind because of improper management. Consumers were very angry over the huge bank bailouts that took place in 2oo7-2008 because many thought they got that way by being too greedy in the first place.
They complained the needed the money to wipe out the stale accounts they had from borrowers who didn't pay back their loans or mortgages. At the same time, many of these same banks requesting a bailout from the Federal Government also had chief executives from their company making six and seven figures just in bonuses.
Needless to say, those borrowers who had almost perfect and perfect payment history complained against those practices. Because of this, a bill was passed governing the credit card industry and how it goes about notifying it's borrowers of changes in interest rates and other vital information. Interest rates have also been capped in many instances.
Going Back To The Basics Of Buying Directly From The Seller Or Merchant
Do you have to submit to this credit system and their way of dictating what you can and cannot do financially. The answer is -no! Many people have decided to escape the credit reporting rat race by living without credit. They have gone back to dealing primarily with the seller or the merchant instead of involving a third (creditor) party(usually a bank or financial lending institution). So what people see today as something they have to do because they have bad credit, is what was done before the banks and financial sector took over the whole credit industry.
Many payday lenders do not check credit because they have gone back to the old system of lending based on your promise to pay as well as having the means (a steady source of income) to pay your debt. You are also seeing a lot of guaranteed personal loans that you can get even if you have bad credit based on the same idea.
Today, you can also buy a house or a car or get yourself a personal loan without having to deal with banks or the credit reporting system. Simply by going back to the way things were done before World War II.