Preparing for the likelihood of more expensive credit

This week, an article in the New York Times suggested that interest rates (and therefore the cost of credit) are likely to move higher over the next several years, reversing a nearly thirty-year trend. This increased cost of credit is likely to have a broad effect, due to the more pervasive use of credit by American consumers in recent years; according to one passage in the story, “…total household debt is now nine times what it was in 1981 — rising twice as fast as disposable income over the same period.”

Implications: While the U.S. economy has by many accounts entered a period of recovery, challenges posed by the volume (and high cost) of credit is emblematic of how the effects of the recession could outlast the recession itself.

The most dramatic part of this NY Times story is a side-by-side chart, which illustrates the extent to which credit has shot-up over the past ten years, indeed faster than the growth of incomes.

If you sell any big-ticket item (for which financing has been an important tool in recent years), this issue is likely to impact your business. Consumers, already prone to cut-back on their use of credit in recent years, are likely to remain cautious about credit in coming years if financing becomes more expensive.

So, for everything from automobiles to furniture to home improvements… an already more prudent consumer is likely to become even more deliberate, judicious, and careful. Are the days of “saving up” for a purchase about to enjoy a renaissance? Will the practice of “layaway” enjoy an increased profile? Instead of “indulge now, pay later,” will companies see an increase in customers who prefer to pay cash? When it comes to major purchases in which credit is used, are you going to get more aggressive about fighting for your share? How?

Mike Anderson