RETHINKING CREDIT

My upcoming book, Stop Flushing Your Money Down the Drain has a strong section on credit issues. There is something useful for everybody including the best place to get your credit report to establishing credit in the first place to advanced techniques that will build a dynamic credit score in short order. I have elected to share a few excerpts with you. Here is a little section covering why I think people ought to be required to take a Credit Test before they receive any credit at all.

YOUR CREDIT AND YOU

Do you have car payments or a student loan? When you use your credit cards, do you get benefits such as frequent flier miles? How often have you refinanced your home? Do you pay off your credit cards every month?

Naturally, most people never give much thought to credit until they are confronted with an opportunity to buy something for which they do not have the money. Department stores, gas stations or cell phones can all be the starting point. The new consumer jumps in without much guidance. The first payments are relatively small compared to the benefits. It all seems so easy and painless, and before long the little card is like a Christmas present that just keeps on giving. But, credit can be very fickle.

Credit can be like a best friend or a worse enemy. It can allow you to take advantage of bargains, and thereby pay less for goods and services, which you already buy. But credit can also be a curse, stalking you, tempting you and stealing away your resources and your future. It can be an addiction, just as damning as alcohol or drugs or gambling. It is a like a powerful saw. In the right hands it can build an empire, but when not used properly, it can cut off the hand of the operator. One thing is for sure: Credit is not “free money”.

HOW IT OUGHT TO BE

Nobody ever asked me, but if I had my way, I would require that all consumers take some sort of preliminary credit-awareness course, and a test, before they are granted credit in the first place. It would be similar to the driver’s license procedure. I suppose if the idea was presented to the Congress or a local Governor, one might hear something like, “There is a big difference, because automobile drivers can hurt other people and property, but credit does not pose the same risk to the public.” Naturally, I do not agree.

When adults get into credit problems, which they cannot handle, families get destroyed. It is often stated that half of all marriages end in divorce and most experts agree that the number one cause is financial hardships. Inevitably, the children are forced to change schools, abandon their friends, adapt to more humble surroundings and live in single parent situations.

All of this leads to bankruptcies and foreclosures, which in turn, means more vacant homes. Basic economics tell us that when the supply of houses is increased, the prices come down; and that affects everybody in the neighborhood. Foreclosures also cause lenders to charge everybody else higher interest rates and loan fees to off-set their losses.

On a grander scale, the entire country was brought to its collective knees when the housing market crumbled recently. Nearly every one of us suffered as housing prices dropped. Trillions of dollars were lost. The Banks closed and countless Americans saw their stock portfolios wither away. The Federal Government took on record levels of debt as additional trillions were created out of thin air for bailouts. All of the new National Debt will be thrust upon future citizens, many of whom are not even born yet. Higher interest rates and hyper-inflation threaten us. We have had a very severe recession. To add more fuel to the already raging fire, many other nations are worried about the financial strength of the once strong America and there is even talk of a world-wide depression.

All of that was because government officials and consumers themselves did not understand how easy it is to abuse credit. So, I say it again, “If we require a test and a license of drivers, because they might hurt somebody else, we should also require consumers to have some basic understanding of credit for the same reasons.” The first class of students should be comprised of congressional members and other government officials.

Comments are welcomed

Next up: Fun Historical facts about credit

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