Tackling the topic of credit is not simple. It is easy to come off as out of touch for suggesting credit is the wrong route to take, since a lot of individuals do in fact need it on emergencies and we cannot control the situations we are sometimes put in. However, it is a means to a many-times-unnecessary end. It is important to make the division between the concept of credit, necessary and “healthy” credit, and toxic credit. This article is for everybody, but it will focus on the unnecessary and/or careless use of it and its dangers in general.
As we all know, credits are loans that are paid back with an interest, usually fixed. Most commonly handed out by banks, they provide both a solution for people who need or want extra cash at the time being as well as revenue for the lending party. From the individual taking the loan’s perspective, it can be a life-saver (literally) and for the lender, it is a worthy yet risky investment, since the probability of the person not paying back always exists. That is why banks always try to make sure of the person’s background before offering a loan; this is usually done by requesting a credit report and some other documents.
Despite banks and lenders in general being careful, we have seen a huge rise in the average debt per citizen worldwide. For example, as reported by Experian the median credit card debt has reached an all-time high in the US in 2017, being of $6,375 per person. How can debt be so common? Well, any bancarized person will tell you– Banks usually send credit cards automatically after a costumer reaches a certain amount of months or years with them if they have good track record. If the record shows someone has paid their bank account’s maintenance costs on time and have a steady income, they will eventually find a credit card on their mailbox at one point or another. If they do not and are on the opposite end of that situation, they probably had enough unpaid debt that their credit score is below what is required, and thus banks see it as too risky to lend them anything.
This is where payday loans come into play. While many of these companies are accused of what is called predatory lending (because they give out high-interest loans to people who are usually desperate for money), they can be the saviour of some people when they find themselves in unforeseen circumstances.
Having said all this, this is all a business to them. Banks, payday loan companies, private individual lenders, all of them. They hope you get behind on your payments, because it means a higher interest for them. And this is when the toxicity comes into place. If one thinks about it, the toxicity itself made the concept of credit possible. It is up to us to play it to our advantage, but how do we do that? Understanding.
We need to all be very aware of all of these points, and decide what to do accordingly. Plenty of people earn enough so they do not need to use credit cards, yet most individuals still have one, or several. If one is interested in building a credit score, then a single card would do the trick. But as any owner of a credit card will tell you, most of the times that is not the reason. Almost nobody is using their credit cards to make small payments that will help them get a decent or even an excellent credit score. It is used for reckless spending most of the times. Now, as I said at the beginning, I am not talking about people who are in dire need for money. People going through financial hardships are not going out and buying shoes, clothing, maxing their cards out on trips, etc. This is a problem most usually found in middle to middle-upper class homes. And this recklessness can kick one down the ladder, hindering us when trying to achieve financial independence.
The issue is most people do not think about financial independence when making purchases. It is a single swipe of a card, a number on your screen changing. It is so hard to see a problem when it is just that- numbers, a couple of digits.
There are plenty of ways to avoid credit, and using it responsibly should the need arise. If you have stumbled across this, then you have probably read about said ways before. The key to all of them is being involved. You can withdraw cash and use it instead of your card to be aware of how much you are spending on an item or service, you can set a maximum per month to be spent, set aside the rest, stick to debit only, you can do a million things. But if you do not have the restraint and willingness to start caring after your finances then you are going to go back to the old ways at one point or another. You can set a goal as well, but always keep in mind those goals will eventually be met, and after that, you are still going to have to maintain a certain regimen. You will always need to have some money in the bank because you never know what can happen in the future.
Being careful and wary does not mean not enjoying yourself. The notion that to save money you have to stay away from fun activities is completely misguided, it is the extremes that are bad. Making a budget and sticking to it is what works. If you save enough, you will not need credit, though depending where in the world you live, building good credit may be necessary if you plan to do certain things.
To summarize, responsibility is key when it comes to credit. Banks know it is a good business because so many people overlook the downsides of loans, so by knowing them you are already a step above them. Decide your best course of action depending on your lifestyle: Is credit imperative in your life? Will you ever need an excellent credit score? Would you rather go debit-only? Ask yourself these questions. Only proceed once you have a plan of action. Credit has some toxicity behind it, but it is up to you to avoid it and use it to your advantage.
(This was originally posted on March 16th, 2018).