Credit Quandary - How Much Credit Should Creditors Give You?

(MoneyWatch)  Karen King owes $36,000. According to the Wall Street Journal, The amount of credit card debt King is carrying is more than she has ever earned in a year.

"Years ago, I lived for now. It was so stupid," the 28-year-old says. "It's depressing, but I can't live that life anymore." Now, she says, "I basically want to live for the future."

Her credit quandary is about how to pay off her massive amount of credit card debt, one dollar at a time, before she's ready to retire (she's 28). King is making tough choices about spending her free time working a second job to make more money to pay off her debt faster - rather than spending her time working out or otherwise enjoying herself.

Tens of thousands of Americans are walking the same mile King is - and are drowning in debt each step of the way. Today, she probably wouldn't get enough credit to nearly hang herself.

Thinking about how King and other folks who are doing whatever it takes to pay down their debts more quickly, it makes me wonder: How much credit should creditors give you?

Twenty-odd years ago, it was tough to get a credit card. I remember getting an application in the mail, wondering if anyone would extend credit to me when my salary was only $18,000 per year. Back then, credit was something that allowed you to borrow money. It was a financing technique. It wasn't something you had, like a credit history or a credit score. Those hadn't been invented yet.

Credit was something you leveraged with care. Miss a payment, and suddenly you'd wind up with all sorts of expensive fees to pay.

I started writing about real estate a few short years after I got my first two credit cards. Back then, I wrote more about commercial real estate than I do now. "Creative financing" was a buzzword for allowing commercial developers to create projects virtually out of thin air. It seemed as though creative financing techniques would allow a developer to put virtually nothing down and yet build a $50 million building. Good for them. (Not so good these days for the banks that continued those commercial lending practices even as the market began to change.)

As I wrote more about residential real estate, I wondered when creative financing techniques would allow home buyers to leverage their savings far beyond the conservative two to two-and-a-half times income range. I wondered whether creditors should give borrowers more credit, even if their income didn't support it. And, I wondered how those borrowers - like King, and others - would eventually pay off their debts.

Today, you can't get credit very easily. Even for those who have solid jobs, savings, and good credit scores, it's a lot tougher to get a mortgage, home equity line of credit, or a big credit card limit.

I heard from a reader this week who has a solid financial background, but the lender won't close because the loan officer doesn't understand where a $7,000 check came from three months earlier. The reader's debt-to-home value ratio on the property is less than 30 percent. He has good financials, plenty of savings, a fat retirement account, a great credit history and credit score and he still has to climb credit hurdles that didn't exist two years ago.

If lenders can't be comfortable handing out credit to folks who are the most credit-worthy, what will they offer to the rest of the country with not such perfect credit?

And then there's this much bigger credit quandary: How will we come out of the recession if lenders won't lend and borrowers won't have funds to spend?

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