Credit Cycle

DEFINITION of 'Credit Cycle'

A cycle involving the access to credit by borrowers. Credit cycles first go through periods in which funds are easy to borrow; these periods are characterized by lower interest rates, lowered lending requirements and an increase in the amount of available credit. These periods are followed by a contraction in the availability of funds. During the contraction period, interest rates climb and lending rules become more strict, meaning that less people can borrow. The contraction period continues until risks are reduced for the lending institutions, at which point the cycle starts again.

BREAKING DOWN 'Credit Cycle'

Credit availability is determined by risk. The lower the risk to lenders, the more they are willing to lend. During high access to credit in the credit cycle, risk is reduced because investments - such as real estate and businesses - are usually increasing in value. Individuals are also more willing to take out loans because interest rates are lower.

After the peak, the assets and investments usually begin to decrease in value, or they do not return as much income, making it harder to pay back loans. Banks then tighten lending requirements and raise interest rates. This is due to the higher risk of borrower default. Ultimately, this cuts down the available credit pool which brings the credit cycle to the low access point.

RELATED TERMS
  1. Business Cycle

    The fluctuations in economic activity that an economy experiences ...
  2. Credit Rating

    An assessment of the creditworthiness of a borrower in general ...
  3. Default

    1. The failure to promptly pay interest or principal when due. ...
  4. Contraction

    A phase of the business cycle in which the economy as a whole ...
  5. Credit

    1. A contractual agreement in which a borrower receives something ...
  6. Credit Risk

    The risk of loss of principal or loss of a financial reward stemming ...
Related Articles
  1. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  2. Insurance

    The Causes And Effects Of Credit Shocks

    These shocks cycle through history. Find out what you need to know to avoid the alarm bells.
  3. Investing

    The Ups And Downs Of Investing In Cyclical Stocks

    This strategy can be profitable but only if you know when to dump these stocks.
  4. Markets

    Great Company Or Growing Industry?

    Look at the big picture when choosing a company - what you see may really be a stage in its industry's growth.
  5. Fundamental Analysis

    Where's The Market Headed Now?

    Whether up, down or sideways, learn about some of the factors that drive stock market moves.
  6. Active Trading

    Market Cycles: The Key To Maximum Returns

    You need to understand the various phases of the market cycle to avoid bubbles and make the best investments.
  7. Term

    How Market Segments Work

    A market segment is a group of people who share similar qualities.
  8. Active Trading

    Market Efficiency Basics

    Market efficiency theory states that a stock’s price will fully reflect all available and relevant information at any given time.
  9. Fundamental Analysis

    5 Basic Financial Ratios And What They Reveal

    Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
  10. Investing News

    Building a Case for the Bulls: 3 Opinions

    These three big names are bullish on the economy. Are there good times ahead?
RELATED FAQS
  1. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  2. What is the difference between positive and normative economics?

    Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ... Read Full Answer >>
  3. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  4. When phase of the economic cycle tends to be strongest for companies in the retail ...

    The economic cycle has four phases. The expansionary phase occurs when the economy is growing. During this phase, cyclical ... Read Full Answer >>
  5. What is the average length of the boom and bust cycle in the U.S. economy?

    The boom and bust, better defined as expansion and contraction, business cycles of the U.S. economy averaged 38.7 months ... Read Full Answer >>
  6. During what stage of the economic cycle should I invest in the telecommunications ...

    Later stages of the economic cycle are the best time to invest in the telecommunications sector. Late stages are characterized ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center