Why The Obsession With Credit?
One thing that, I think, makes me unique among Americans is that I’ve never paid a dime of interest charges in my life. I’ve always rented my housing. I paid cash for the one car I’ve purchased, the previous junker having been given to me by my parents after I graduated college. I’ve borrowed 0% money from credit cards, to engage in interest rate arbitrage. But in all I’ve never paid for the privalege of using somebody else’s money.
I realize I’m the oddball when I hear friends talk about their car payments, virtually everyone either: has one or has recently paid it off and is well on their way to financing yet again. Why would you use credit to purchase a depreciating asset, that will be worth considerably less than you paid for it by the time you pay it off? I hear things like “I can’t wait to pay this car off so that I can get a new one” or “hopefully we can get a few more years out of our first car so that we can finish paying off the second first.” This kind of thinking traps you into financially dangerous situations. The decision to replace a car should be made when the car is no longer practical. Situations such as, when it’s no longer able to get you to work reliably or when a significant expensive component fails and it’s no longer economical to repair.
I can understand a salesman’s obsession with credit. It’s much easier to sell a “$30 a month” Bose sound system than a “$2000″ Bose sound system as optional equipment on a car. Talking monthly payments also helps him to obscure calculations and do some math trickery to maximize your spending. The $20 extra per month for you could turn into hundreds for him.
Credit certainly does have a place. For a person fresh out of college with a job but no car and no money yet, credit allows that person to get the car that enables them to get to work. For them, they get return on their investment. The interest payment allows them to go to work to make even more money. Compare this situation with a person who already has a car coming out of college. It may not look great but there’s a good chance Dad probably did his research and got you a nice reliable car to take to college. In this situation you can already get to work and make the big bucks. What investment return does paying those interest charges get you? Not a damn thing.
It’s unfortunate that the US has become so reliant on credit. Just look what’s happened to the economy in the past 2 years. The banks reduce their lending and the proverbial “stuff” hits the fan. It’s not like they even reduced their lending much. If you’re the type that pays your bills ontime and aren’t already fully leveraged there’s a good chance banks will lend to you. Just turn on the TV virtually any time and see the advertisements for cars, along with financing offers. The money is there to be lent, only now it’s only to the right borrowers. This small reduction in lending is enough to plunge the stock market thousands of points.
Maybe I’m the crazy unusual one again, but I think when the market hits bottom and starts heading up again I hope it’s based on normal lending patterns, the kind where the good borrowers get credit and others pay cash. If we start the economy again with constrained credit, we’ll find a way to make it work. The money will still be there to be lent to people making investments: in careers, in businesses, and other credit strategies that provide returns. At the same time, credit will be limited for consumerism. In other words, provide the credit for production, not consumption. Sorry “$30 a month” Bose sound system…
