Excess of credit From a microeconomic point of view, it is a situation in which the debtor needs to have an amount of money greater than that established in the credit limit granted. In a macroeconomic aspect it refers to a situation in which banks lend more money than necessary for investments.
In a simple way we can say that, in the microeconomic aspect, it occurs when we have more money than our loan policy establishes. We should not confuse it, therefore, with the discovered in account, which is an exceptional authorization. At a macro level, this problem occurs when a country’s bank lends more money than is really needed. In this way, there is a situation where loans increase to levels that could be considered excessive.
Characteristics of excess credit
For the individual, a series of details in relation to excess credit must be taken into account. In fact, it is occasional and for that reason, it should not be used lightly.
- First, it will always appear in the credit agreement or loan. In this way, it will indicate how much, when, how and above all, the cost it will have.
- All conditions must be published on the notice board of the entity. That is, you must make it clear to the customer what they are going to charge and what are the conditions to access this excess credit and this must be public.
- The entity has the right to charge an interest rate different from that of the credit or loan itself. In fact, it is usually higher and may consist of a fixed interest or a differential over the ordinary rate.
Within a country, exceptional situations can also be promoted that may cause credit excesses in the short term. They are usually accompanied by previous excess liquidity that is channeled towards loans, especially mortgages. For this situation to occur, the central bank responsible for expansive policy must justify its action and set the limits.
Example of excess credit
With an example we will see all the above easier. Imagine that the bank gives us a credit card that allows us to have up to € 3,000. We made a series of buying and one month we realized that we will need € 200 more.
Although it is always best to pay this difference in cash, being an example, let’s think we don’t have the money and we need to make that purchase. We go to the bank and he tells us that he agrees that this possibility was established in the contract. But that being an excess of the limit should charge us an interest 5% higher than the one that charges us for the card. In the end we will pay an interest rate for those € 3,000 spent and another, 5% higher, for € 200.
As was the case with excess liquidity, at the national level, an excess of credit that remains too long can end up generating a bubble. Something similar happened in the 2008 crisis, especially with the mortgage loans.