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With Coming of Easier Credit, You Must Know What's Good and Bad Debt

NEW YORK ( TheStreet) -- Loans have been hard to come by for many since the financial collapse of recent years. Now lenders say that's changing, with a solid majority of 60% predicting a normal balance by the end of the year between the supply of credit and consumer demand, according to FICO, the lending-information firm.

Translated, that means lenders will have to work harder to compete for customers, making mortgages and other types of loans easier to get. That could help offset some of the pain if loan rates continue to drift upward, as many experts expect.

In shopping for a loan, the consumer will be freer to emphasize the best deal, rather than merely hoping that someone -- anyone -- will approve an application. The FICO survey found that 36% of lenders expect the loan approval rate to increase. Only 15% think it will decrease, the lowest for that pessimistic view that the survey has ever registered.

"This is the first time since we initiated the survey in 2010 that expectations for the growth of credit demand did not exceed expectations for the growth of credit supply," says Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs, the firm's research arm. "This shows the strength of the U.S. economic recovery and is in sharp contrast to what we see in Europe."

FICO's survey found that 61% of lenders expect the average credit card balance to increase, reversing consumers' debt-trimming habits of recent years. By a large majority, lenders predict a decline in credit card delinquencies.

"These results say quite a bit about the psychology of borrowers and lenders," Jennings says. "After years of caution, lenders are now in growth mode and feeling good about extending credit. But I find the borrower side of the equation even more intriguing. It appears that borrowers are beginning to shed the frugal habits that helped them deleverage to the tune of more than a trillion dollars since 2008."

In the survey's only sour note, 56% of lenders expect student loan delinquencies to increase. Rising college costs now appear to be one of the country's chief financial problems.

So what's the bottom line for consumers?

If you've been sitting on the sidelines assuming you wouldn't qualify for a loan, it's time to start looking. Now you may be able to get a mortgage or car loan, or an increase in your credit card limit. And if you're turned down today, try again in a few months.

But consumers would be wise to hang on to some of the frugal habits they've developed in recent years. The financial crisis was fueled by a borrowing binge, with millions of people amassing more debt than they could afford. The drop in home prices and rise in unemployment turned that recklessness into a disaster.

"Good debt" serves as a form of investment. Borrowing for a home, so long as it's not too expensive, is a good investment because over the long run owning is cheaper than renting. Borrowing for education can pay off with a better paying job.

"Bad debt" does the opposite, draining money from your future through interest charges and penalties. Racking up credit card debt for nights on the town or a closet full of rarely worn clothes is asking for trouble. Borrowing big for a fancy car is bad debt; borrowing a little for a used car to get to work is good.

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