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Credit is NOT bad

Credit is not bad - But the way we use it IS!

Edilberto Salazar (name changed), 35, married, with one daughter, is a man that I met over two years ago while working for an IT firm in Mexico. This man owed over $200,000 (£10,000+) pesos to the bank, more than $100,000 (£5,000+) pesos in taxes, plus his mortgage and personal credits at department stores. He is one of those guys that saturates one credit card, then applies for another to which he transfers all his overdue credit from his other card, and so on.

He is just one of many people I have met in several years that has the same problem. Endless calls and letters, harassment, and bad looks from friends and family. The truth is that he is just one in millions caught in the same situation.

Credit was created as a way of obtaining something we want now and paying for it later, at an interest, of course. Interest rates and other surcharges are the building blocks of banks, lending companies and other financial institutions. In fewer words: Banks charge for the “benefit” of lending you the money you need right now.

But it’s not just money nowadays, is it? Back in the old days it was mostly about a means to purchasing the home you’ve always wanted, or paying for a costly operation, or buying something you really need urgently. Nowadays the amount of things you can do by credit is enormous: Clothes, home appliances, cars, luxury items, handbags, mobile phones, phone contract payments, payments for other debt you may have in other financial institutions, education, even a haircut for goodness sake. Just about anything can be “purchased” on credit, and if the store doesn’t have its own credit line, you can probably still pay with your Amex, Visa, Mastercard, Maestro, etc.

But the concept of “free money” is what has started the massive wave of debt. We saw it recently with the credit crunch, but we’ve seen it previously countless times. And it’s not about individual people any more, it’s about entire countries indebted to others.

Why did this last credit crunch occur? Because of the sub-prime mortgages, the ratings of CDO. MRS, ABS and other deals, the lending, selling and packaging of these deals amongst banks and world-wide financial institutions, etc. They thought the gold mine would never end, and when it looked like it was depleting they found another way of marketing and selling the same deals as new products to investors, creating new indexes in the stock market, and eventually tying everything up in a way that a credit crunch became unavoidable.

But it’s not the banks fault, nor the investors, they are just looking for ways to make more money. The fault lies within the general public, as described by Tetsuya Ishikawa in his book “How I caused the credit crunch”. Credit allows you to have a house before you can pay for it, clothes without any money on you, and more importantly, operations and medical care when you do not own enough money to pay for them.

We all need money for certain things in life, but we also ought to have some decency (or put more straightly: intelligence) and analyse all options into consideration. Credit is a tool, an aid through difficult times, it is not free money, and it often results in a much higher cost than what you could have paid originally for it. Interest is a killer.

So if this opened a wound in you, try to sort out your problems, and lay off credit for life unless REALLY needed.