Chapter 7, Problem 11CT

Summary Introduction

To determine:

Lack of vision to refuse a loan or issue credit cards to people without a credit history.

Introduction:

It might be shortsighted to bluntly refuse loans and credit cards to students and consumers without less-than-stellar credit because there are several ways in which the loans can be secured and given to students and consumers with no credit history. Moreover, interest earned from loans is income for the banks.

Explanation of Solution

Solution:

Banks are financial institutions whose primary function is to accept deposits for the purpose of lending and making investments in order to earn profits. The main source of income for banks is from interest earned from loans and credits it gives to its customers. Since interest is one of the main sources of income for the banks, it is not prudent to bluntly refuse loans are credit cards to young students or to people who have a low credit score. However, the concern of the banks while lending to people with no steady source of income or low credit score lies in the fact that the loans might end up into bad loans and result in a loss for the banks. So, the banks should explore the various means it has at its disposal while lending to these kinds of customers.

Credit cards can be issued to such customers in two ways:

Secured Cards: Through this method, a credit card can be issued on the basis of deposit usually to the tune of 200 dollars to 1,000 dollars before the account can be opened.

Student credit cards:

These credit cards are issued to students who earn from part-time jobs and also have never owned a credit card or have little or no credit history. The student credit cards usually have low credit score requirements with low credit limits. Students are advised to use cards judiciously as this helps them to learn regarding credit card usage and also build a credit score. Having a credit card helps students secure jobs and get insurance as companies can check their credit worthiness.

In the same, way loans can be offered to customers with less than stellar credit score by exploring the various options available like personal loans and term loans or Business Lines of Credit.

Therefore, it is important that banks do not bluntly refuse loans to students or customers with no credit history but explore the various options of lending available to them because interest earned from lending is a source of income for the banks.