Cheap Credit is Bad

ffs · 3 February 2005 at 8:31AM

..for most people.

My argument is counterintuitive, and took me several years to appreciate. Most of the advice on this site is about saving money, which is great, except that is not always in our best interests. How can that possibly be true?

Because credit is very similar to other addictive consumer products. It is similar to drugs in as much as once you use it regularly, it becomes impossible to envisage a world when you can't use it.

It is similar to food in that the cheaper it is the more you consume, rather than the less you spend. The developing world is not saving money because food is cheaper than ever before, instead it is eating more and becoming obese. The same is true for credit.

Cheap credit, by which I mean credit that enables you to repay a relatively small amount per month (which is often the same as low interest rate credit, but not always) will allow people to borrow more than expensive credit. This is because with expensive credit you run out of income more quickly and either stop borrowing, or default preventing further borrowing.

Thus if only expensive credit is available the less your total debts are likely to become, which also makes it more likely to be able to repay when windfalls occur. But most people don't get in to problems with their debts, do they?

Well I'm not so sure, certainly most people using this forum are likely to be able to use cheap credit to their advantage (by stoozing etc) but obviously this isn't the case in the general public, otherwise the companies offering credit that MSE readers take advantage of would not be profitable.

In other words, it's only because most people can't save money in the way that is promoted on MSE, that these low cost credit deals exist.

These low cost deals always used to encourage consumers to increase their total borrowing. They are the freebie that the drug dealer offers knowing that soon enough the consumer will be back for more, and more, and more.

I don't expect many people to agree with me, but I believe the figures speak for themselves. Total borrowing in this country is higher now (allowing for inflation) than ever before, and cheap credit is easier to get than ever before.

dag_2 · 5 February 2005 at 4:57PM

I don't expect many people to agree with me

On the contrary, I think you've raised several valid points.

If you're deeply in debt, it's not your fault - and you've explained some of the reasons why it's not your fault.

However, saying it's not your fault isn't the same thing as saying there's nothing you can do about it. It's true of drugs, binge drinking, gambling, codependency, and it's also true of problem debt. You can take control, and overcome the problem - but it takes time, and you will need the support of others.

Oh yeah - and sometimes, people use cheap credit to pay for habit-forming drugs. The problems can't always be separated. You might finally realise that you have a problem when your card is maxed, and you can't get your next fix. But if your card never maxes, you might die of an overdose. I don't think that wealthy people are more likely to get hooked on drugs than poor people - but if a rich person does get hooked on drugs, they're less likely to have the self-awareness necessary to go seek treatment than a poor person. That's one of the reasons why mainstream religions generally frown on overt materialism.

But you don't have to be hooked on drugs to have a problem with debt.

nh · 5 February 2005 at 5:28PM

But cheap debt allows people to spend more therefore helping the economy. This is what kept us out of the recession the rest of the world suffered recently. Low interest rates led to higher house prices, people felt rich and spent more - that is good for the country if not for the people with the debt!

I don't agree with you, though I do take your point that the savvy consumers who can get cheap rates are beign subsidised by people who pay higher rates and can probably afford it less ie the rich get richer, the poor get poorer.

Maybe this post is better in the discussions board - they'd have a field day with it there!

!!!!!! - please re-post this there, you would get such a good response.

EDIT: How is it that it is not your fault if you are badly in debt?

nh · 5 February 2005 at 5:31PM

Also, I would say that many people get into debt once and then swear never to get into the same situation again. For them, debt is not a drug, or at least not one they are still addicted to!

ffs · 6 February 2005 at 7:57AM

nh wrote:

Also, I would say that many people get into debt once and then swear never to get into the same situation again. For them, debt is not a drug, or at least not one they are still addicted to!

I'm not saying debt is addictive any more than a hangover or a heart attack. Credit is the addiction, just as alcohol and tobacco are.

ffs · 6 February 2005 at 8:27AM

nh wrote:

But cheap debt allows people to spend more therefore helping the economy. This is what kept us out of the recession the rest of the world suffered recently. Low interest rates led to higher house prices, people felt rich and spent more - that is good for the country if not for the people with the debt!

Cheap Mortages are Bad, and this is a slightly different argument to my original proposition. As you quite rightly said, low interest rates lead to higher house prices, but very few people are in a position to use this extra wealth, only those downsizing or with deceased parents.

To most people higher house prices simply mean that the proportion of their home that they are able buy with savings, rather than with a mortgage, will be lower. It means that the possiblity of making a difference to the level of outstanding mortgage using lump sum payments is reduced, thus increasing the long term reliance on a mortgage.

Also, as you pointed out, rising house prices encourage people to spend money that they think they have, but in fact they are borrowing it. This increases people's reliance on credit generally, and therefore increases the number of people who develop problems with debt.

budgetflyer · 9 February 2005 at 1:34AM

Cheap debt is certainly better than expensive debt but I kind of agree with your line of thought.
The following is not me yet but sometimes I feel im on this path :-)

Low mortgage rates encourage us to borrow more.We think were getting on,earning more so we borrow more to get a bigger,better home.which is worth more .We consider it an investment and pat ourselves on the back for doing so well.We cut a bit of interest here or there with 0% cards into the mortgage and every 2 or 3 years we do another deal on our mortgage to save us another few quid on interest payments.Then after X many years its paid off.Hopefully we retire and put our feet up.
But because its a big flash house in the best area in town the council want £200 a month tax on it .But weve retired and knackered (due to working an 80 hour week to pay for our marvelouse investment) so we cant afford that amount of council tax so we sell up get a cheaper, but not so flash house in a lower, affordable tax bracket. Live well on the profit for 5 years give or take, and then..........

.............SNUFF IT

dougk_2 · 9 February 2005 at 10:58AM

Whilst I agree with many points that have been said, I still feel that regardless of rates there are a large number of people that will get into debt and still borrow more. I am convinced that the rate doesn't matter to some people.

What needs to happen is more checking and more critera needs to be set in order to borrow. Loans should be made on affordability only and not on "potentials". If you are in substantially in debt then you should be lent no more.

Whilst I understand that for instance most students end up in debt becuase there are no longer grants, there are alternatives. For instance I left school, worked and saved money in a not to good job, but undertook my degree part time evenings and weekends - hence I was earning and not needing the loans etc. Whilst this offers you short term pain in terms of socialising and having no time for "life" long term it was far better than having huge debts. People forget that many employers are as intereseted in experience as qualifications.

Cheap Credit is Bad

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