give Kiwis a score from minus 330 to plus 1000. Most people will rate above zero but anyone with a score of less than 100 will find it difficult to obtain credit from a bank or finance company. The average score will be in the range of 500 to 600, and a person with a score of 700 will generally be considered a good credit risk.
I’ve often used this blog in the past to talk about issues surrounding credit, financial literacy and consumerism, this new got me thinking about the same old issues. I’m not against the Veda Advantage concept, it’s just that I believe it doesn’t address the core issues. So why is this a blunt instrument?
There’s a demand side problem here
As I’ve written about previously (and as the Governor of the Reserve Bank spends sleepless nights awake worrying about) New Zealanders consume far more than our outputs would indicate is viable. This has been fuelled by a perfect storm of easy credit, exceptionally accessible imported products and very low levels of financial literacy. The fact that we can hold credit cards, mortgage ourselves to the hilt and take on hire purchase with no real understanding of economics is a travesty in my mind. True reducing the availability of credit through a tool like that which Veda is introducing solves the issue in the short term, but it doesn’t address the underlying issues that make us, as a nation, borrow well beyond our means.
Alex Tarrant says it right on interest.co.nz when he bemoans the fact that the recent economic downturn, especially as it relates to residential property investment, seems to have taught us nothing – after a very short hiatus, we seem to have jumped back in, at least at an aggregate level, to the promise of a quick buck through property investment – wherefore art thou oh financial nous?
There’s a supply side problem here
Another issue that I’ve raised previously is the dearth of options available to business borrowers. Again I’ve mentioned it before but the fact that a business generally finds it almost impossible to borrow money under it’s own auspices, yet individuals are offered money from lenders seeming with abandon. There are a number of wildly profitable businesses that are constrained by their inability to raise funds, meanwhile it would seem we all know of a few truly marginal businesses whose principals have borrowed funds against their own houses – this despite the fact that the business they’re borrowing for isn’t viable.
There’s a suite of solutions to these problems
So… what does New Zealand need to do that will effect the improvements that we need, without the blunt force impacts that Veda’s plan will bring;
- Increase financial literacy. Re-introduce compulsory economics in school. Make basic financial education a prerequisite for setting up a business. Show people the downsides to debt fuelled consumption
- Ease business lending – Find ways to ease credit to businesses whilst at the same time not encouraging individuals to borrow for unnecessary expenditure
- Aggregate data – currently the corporate veil of limited liability companies hide an individuals true financial position, and make it almost impossible to accurately assess their financial knowledge. Allow transparency so lenders can make much better (ie more informed) lending decisions
Keen to hear any thoughts from out in the ether….