Yahoo Finance Will a Nation Full of Credit Freezes Freeze the Economy?
When historians look back at the trends of 2017, one has to imagine that "credit freeze" will be on a list somewhere.
Exact numbers on how many consumers are currently setting up credit freezes are hard to come by, but judging from reports of long waits on hold at the three major credit bureaus, Equifax, Experian and TransUnion, it seems evident that a lot of people are doing their best to get one. As you've no doubt heard by now, the credit freezes are inspired by the breach that occurred at Equifax this summer. From mid-May to July 29, it's believed that hackers may have collected personal information -- such as Social Security numbers and birthdates -- from as many as 143 million American consumers.
So will a nation of credit freezers end up hurting the economy? It's impossible to say for sure, but there are several schools of thought.
[See: 12 Habits to Help You Take Control of Your Credit.]
A credit freeze trend may help people stay out of debt. That's what Giacomo Santangelo hopes. "There is no way of knowing the full effect until some time has passed," says Santangelo, an economics professor at Fordham University in New York City.
But he says he hopes the credit freezes do have the effect of consumers resisting taking on so much debt, like when they impulsively agree to apply for a store credit card.
"U.S. consumers now have more revolving credit than they have ever had in history, over $1 trillion, growing at roughly 4.9 percent a year. This, according to the [Federal Reserve Bank of New York], brings U.S. household debt to $12.7 trillion, a record high," Santangelo says.
"Just because you have the ability to live beyond your means, does not mean that you should," he adds.
Identity theft could go down. This is probably Pollyanna-ish thinking, but there is another possible upside to incidents like the Equifax breach. Eric Mattinson, an investment advisor representative with Semmax Financial Group headquartered in Winston-Salem, North Carolina, says that he thinks consumers are continually being forced to become more savvy about scams. With the Equifax hacking, that's putting consumers even more on guard.
"I feel the average consumer is becoming accustomed to the threats and scams that are so prevalent to occur these days -- which should help reduce the number of victims due to the awareness being much higher now than it was even a few years ago," Mattinson says.
[See: 25 Ways to Fix Your Finances Fast.]
Life will probably go on as normal. That's what Jeff White, based out of Seattle and a financial analyst at FitSmallBusiness.com, thinks.
"I don't think that credit freezing is going to prohibit many people from taking out loans," he says. "Those who are most likely freezing their credit for the long term are not the ones most likely to open credit accounts. Freezing them also doesn't stop anyone from using current credit cards, so the debt could still climb even if everyone opted to freeze their accounts."
He also thinks a lot of people recognize the breach happened over the summer, and because of that, he says, "people's information has been out there for some time now, and many have not seen a negative impact. Due to this, many people won't elect to freeze their accounts. Others are going to unfreeze the account as soon as they need to open a new credit account, and they won't go through the trouble or cost of freezing them again afterward, in most cases."
He also thinks human nature is another reason we won't see all that many credit freezes and changes in how we manage credit.
"We have a tendency as a society to have a short-term memory, and when consumers don't see anything bad happening then they move on from it," White says.
He may have a point. Al Zdenek, based out of New York City and the CEO and founder of Traust Sollus Wealth Management, says that approximately 10 percent of his clients have called to discuss freezing their credit. Of that, he thinks half of those clients have actually gone ahead with a freeze.
"I feel that there is a knee-jerk reaction to this right now driving people who are very worried," Zdenek says, adding that if people are really worried, and they want that peace of mind of freezing their credit, they should.
Mattinson, too, says that he hasn't had many clients discussing freezing their credit.
If you are interested in freezing your credit, it isn't technically difficult, though it does take some legwork -- and with the number of consumers interested, there have been reports of people having trouble doing it through the websites and some bureaus have been accused of making it hard to do. But basically you should be able to go to the Experian, Equifax and TransUnion websites to request a credit freeze.
At the time of this writing, it's hard to find TransUnion's credit freeze page. So if you're looking, here it is. And here is Equifax's credit freeze page. And Experian's credit freeze page.
[See: What to Do If You've Fallen (Way) Behind on Your Credit Card Payments.]
Economic Armageddon is coming. That's another school of thought. James Cochran, a statistics professor at the University of Alabama, doesn't really think the country is headed for a downturn due to Equifax, but he says the potential is there.
When there is less credit, that can mean less demand for products and services, which drives down prices and profits and potentially leads to increased unemployment, Cochran points out.
"In the worst-case scenario, this cycle repeats and leads to an economic downturn," he says.
But Cochran also says that usually when there are large-scale changes to the credit market, they are driven by the supply side -- that is, the lenders pull the plug on credit. We may be in new territory if the borrowers are the ones spearheading a trend toward less credit being offered.
But, similar to White, Cochran doesn't think the credit freezes will affect the country that greatly.
"Some economists may be concerned that incidents such as the Equifax breach may erode consumer confidence in the credit system, but I also suspect that the impact of such erosion will be minimal," Cochran says. "We have seen breaches such as this before, although not at this magnitude, and the economic impact has been negligible. Furthermore, I suspect that it is very difficult to live without credit once you have built your life around credit, as many Americans have done."
More From US News & World Report
