Jul 23 2008

What To Consider About Credit

Published by at 12:07 am under Debt and Credit,US Economy

“Credit is a system whereby a person that cannot pay gets another person that cannot pay to guarantee that he can pay.”  – Charles Dickens

 

Credit…most of us cannot live without it; some of us wish we never knew it existed.  I suspect this sentiment goes back to the beginning of mankind – because with credit comes debt.  When managed carefully, credit is a powerful tool that allows both businesses and individuals to reach for and achieve beyond what could ever be possible if all payments were required up front or upon receipt.  Just stop and think about how your life would be different if you had zero access to credit.  You would need to save every dollar you could for over half of your life just to be able to buy your own home.  You would also have to pay for every purchase immediately or you would need to transfer money in advance of any service you intended to use.  This simply wouldn’t be practical in the world we live in today – you get the point.

 

As recently as mid-2007, it was so easy to qualify for significant levels of credit – in the form of business loans, lines of credit, mortgages, home equity loans, credit cards, etc. – that many a business or person fell into the “credit trap.”  Now you can’t watch the news without hearing about the soaring level of business and personal bankruptcies and mortgage defaults.  It is simply amazing how quickly the worm can turn.  Tony Pugh of the McCatchy-Tribune News Service reported this month that commercial bankruptcy filings for the first half of 2008 are up 45% from last year.  From April through June, 15,471 U.S. businesses ceased operations.  Today it was reported that quarterly losses for Wachovia were nearly $9 billion due almost exclusively to sub-prime mortgage defaults.  Considering this news, it is no surprise that credit is not quite so easy to come by suddenly.  Regardless of whether it is easy or hard, many of us need to do a better job of making sure we know what we could be getting into before taking the plunge.

 

As a general rule, it is usually better to avoid using credit if you have a choice – unless of course you are investing in an asset that will likely increase in value over time or the cost of rental exceeds the cost of financing (principal and interest) and you clearly have a long-term need.  If you can deduct the interest on your taxes it makes even more sense to utilize credit and finance…but do not let this be the only reason that you finance an asset.  Easy credit in any form can lead to overspending.  The resulting payments absorb funds that could or should be used for other needs or opportunities (see opportunity cost).

 

The number one rule of thumb regarding credit is: if you feel like you shouldn’t be purchasing something with credit, you probably shouldn’t.  This applies to personal and business situations.  And finally – never use credit on high-risk investments that would threaten your security if they do not produce the desired results.  I think now we should all go to work getting the economy back on track. 

2 responses so far

2 Responses to “What To Consider About Credit”

  1. Susan Kishneron 23 Jul 2008 at 12:34 am

    I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you down the road!

  2. […] Professional Finance Article Site: On this site, you can find all the related finance articles. You … wrote an interesting post today onHere’s a quick excerpt “Credit is a system whereby a person that cannot pay gets another person that cannot pay to guarantee that he can pay.”  – Charles Dickens   Credit…most of us cannot live without it; some of us wish we never knew it existed.  I suspect this sentiment goes back to the beginning of mankind – because with credit comes debt.  When managed carefully, credit is a powerful tool that allows both businesses and individuals to reach for and achieve beyond what could ever be possible if all payments wer […]

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