Credit?

It has been quite some time since I posted a new entry on here. It was to be expected given that I really have this place as a way to vent, and the last couple of months have just been too busy to sit down and write something meaningful. In all honesty, it really still is too busy, but I have gotten to a point where I could use a break from my hectic schedule.

After all the “feel good” entries I did about the Mini and my motorcycle endeavors earlier in the year, it is time to get back to some more down to earth bitching again. Do not fear though, because with the ski season just around the corner I am more than likely to have a number of exciting things to say about that in the near future. Mind you, it is probably a bit too warm here for the time being for proper snow fall, and there has been very little precipitation in the last couple of weeks, so it may just be that I start bitching about a lack of snow…

Today I wanted to talk about loans and excessive personal debt. It is a topic that regularly has me annoyed, but recently there has been a resurgence of the topic in the media. It seems the economic crisis we have been experiencing since 2008 and that does not seem to want to go away is claiming a number of victims. Add to that the approaching consumer feast of Christmas, and we have a recipe for disaster looming.

One important value I was taught growing up was that of money. If you want to buy something you will need to save up until you actually have enough to do so. Borrowing money was something to be avoided, and should be reserved for real estate purchases. Whenever there was something that I really wanted, I would set about saving money over time until I had enough money to buy the coveted article. Many times this would imply foregoing getting the latest and greatest, and certainly avoided many impulse purchases. Later, as I got my first credit card, I used this simply as a means of paying rather than a way to borrow money. Again, if I did not have the money in the bank to pay for the credit card invoice at the end of the month, I would not conclude the purchase. This is particularly important given the prohibitive interest rates credit card companies tend to charge. I often feel credit card companies are nothing but legal loan-sharks when it comes to lending money, and the only real difference is that they will probably not come and break your legs if you don’t reimburse them on time… This approach to purchases is one that I still apply, and although over time my finances have improved and so I often do not need to save up further to buy something I like, the process has instilled a way of taking time to consider any purchase. As a result, more often than not I actually end up not buying that new (insert gadget/object here) because I realize that I actually have no need for it.

Starting out in adult life together with my (future) wife, I had purchased a second hand TV and was renting a VCR. Since we were avid video watchers, we decided that we actually wanted to buy our own VCR. The problem was that at the time the cost of a new VCR was equivalent to something like half a monthly salary. Given that rent, food, insurance etc. was already absorbing pretty much all of the pay check, this was not going to be easy. So we set about saving up for it, and I believe that after 7 months of cutting down on food expenses (this was pretty much the only variable we had in our expenses!), we had finally scraped together enough money to by the VCR we were dreaming about. It was a very proud moment when we brought home and installed it. The effort we had gone through to get it probably made us appreciate it all the more, and we had avoided racking up any sort of debt.

Today, people have gotten used to the idea of always having everything. The consumption society we have become dictates that we must all have what our friends and neighbors have. You simply must have that new giant flat-screen TV, and the new iPhone 6. The fact that you already have a very functional phone that does what you need it to do does not matter anymore, and such purchases have become necessities. Everywhere access to credit is made available, and it is especially around the holidays that this phenomenon becomes the most prevalent. If you happen to have kids, the situation is even more extreme as they must not feel left out from their friends. The fact that year-end often coincides with a number of other major expenses makes it all even worst.

The behavior of buying what you can’t afford concerns really all classes, not just those struggling to get by. An article I was reading today was mentioning how bankers are pawning their expensive cars in December so that they can buy extravagant gifts for the holidays, and then repurchase the cars when they receive their bonuses in March. According to the article, this practice has become quite common in Geneva where expensive cars are the norm. It would seem to me a lot more logical to actually save up that big fat bonus in order to make those big purchases later in the year. Certainly you would save money as you avoid paying any interest on pawning your vehicle. It is just that society today for the most part works in the way that the more we earn the more we must immediately spend. With the spending then quickly out-accelerating the income, that little debt you started in your late teens because you just couldn’t wait a couple of months for your new phone will soon become a mountain.

So, the fact that it seems the recent past has taught us nothing, it is very likely that we are heading for another credit crisis. Yes, interest rates are for the most part low (unless you look at what some credit cards are charging!), but this is not something that is going to last forever. The general public just continues to take up more and more credit, and it then really only takes a very short period of reduced income to quickly become insolvable. Should interest rates just increase a little bit, the impact on all of those that have a large number of small credits will be devastating. It is time we began thinking more carefully about how we buy things, and start to really think about buying that latest gadget before we do it. Unfortunately I doubt this will happen…