Credit Limits
- Reducing high - risk borrowing.
- Controlling inflation.
- Reducing the current account deficit.
This would entail:
- Restricting loans to x% of the value of the item being purchased or providing security. E.g. Home buyers might be restricted to borrowing up to 90% of the value of a house.
- Restricting the total debt to income ratio for borrowers. This would require lenders to know the level of debt already owed by the prospective borrower.
If an Optimal Exchange Rate mechanism was in place (as recommended) then the primary purpose of setting Credit Limits would be to avoid systemic problems caused by excessive over-borrowing by individuals.
Depending on economic conditions the RBA could tighten or loosen credit limts to control the level of economic activity. Interest rates could continue to be used but would become a secondary control measure.
Equity Issues
Restricting credit to low income earners through Credit Limits may be seen as regressive. However, preventing low income earners from taking on excessive levels of debt should assist them to take control of the financial situation.
Limiting all home loans to (say) 90% of valuation may create difficulties in saving for a deposit in the short term but it would also be likely to reduce house prices and so improve affordability.
Centralised Credit Rating
Allowing individuals to accumulate excessive debt is not in the interest of the individual or the lender. The costs of bankruptcy flow through to the rest of the community via higher credit charges, crime and social breakdown.
Storing the credit data does create privacy issues but these can be resolved with appropriate controls.