Be aware of credit risks and use your money wisely – after all, you worked hard to earn it. Often the easy credit solutions will come back to bite you in the butt.
Fifty years ago, credit was hard to come by. Banks were hesitant to
lend money without collateral of some kind or without significant net
worth on the part of the buyer. Now, it seems banks are more than
willing to throw money at us. They are gambling that we will use the
credit and carry a balance – the fees and interest charged on the loans
and cards are huge sources of income for the bank. The more we spend,
the more they make. Today getting credit is easy, and getting in
serious trouble with the credit is even easier.
Too Much Credit?
The
average person can borrow over three times his income to purchase a new
home – with little or no down payment. Car loans can be taken out for
over five years to help buyers purchase expensive vehicles at a
reasonable monthly payment. Credit card pre-approvals and applications
arrive at the mailbox daily. With so much credit available, it can be
very hard to resist, even for those who know how dangerous it can be.
A
home loan should not be more than two times your annual income, before
taxes. So why do banks offer you up to three times your income? Because
they know you will do everything you can to pay your mortgage each
month and because they know most people will spend as much as they are
allowed. It takes a strong person indeed to spend only $200,000 when
they are told by the bank they can spend over $300,000.
Cars
lose value instantly when purchased, and the longer a loan, the less
car you own each year. Considering most buyers trade in a car in less
than five years, the banks offering the long loans are making a bundle
on the long, drawn out interest charged over the years on a car that is
seldom worth what a buyer ends up paying.
Credit card companies
have a relatively safe bet that consumers won’t be paying off the
balance each month. Balances on credit cards are subjected to very high
interest rates. The higher the balance and interest rate, the more
money the bank is making. And the less likely you are to ever have the
card paid off again.
Credit Dangers
With so much
easy credit, its no wonder the average consumer has over eight thousand
dollars in debt. With incomes unlikely to rise at the rate of spending,
the payments on all the debt cripple many households. House payments
eat up half of the monthly income and car payments take out another
large chunk. Minimum credit card payments total large amounts and every
dollar sent to the cards is getting you nowhere close to debt free.
Using
too much credit is a spiral that is hard to stop. The more you spend,
the more you pay on bills. The more you spend on bills, the less cash
you have, so the more you borrow. Of course this increases your bills
further and finally, you owe more than you make. When this happens
there are few outs other than bankruptcy or some form of debt
counseling.
Protecting Yourself
Rather than
trying to dig yourself out of a financial hole for years, it is far
better to stay away from falling into one in the first place. Credit is
a wonderful thing that helps us make large purchases and enjoy life,
but it must be used wisely.
Be realistic with the amount you
can spend and avoid temptation. Every dollar you borrow is costing you
money, and the more you borrow the more money you are making someone
else. If you can’t pay cash at the time, be sure you have the ability
to pay more than the minimum on each bill. Pay your credit card
statement in full each month and avoid high interest rates and long
terms. Be aware of credit risks and use your money wisely – after all
,
you worked hard to earn it.
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