Is Credit Evil?

And if I change my mind
A million times

-Shania Twain

I hate certain types of credit.  I don't own a credit card and I don't want one.  Payday lending,  tax refund anticipation loans and other forms of legalized loan sharking should be outlawed. 

I've watched  many people get in trouble with upside down car loans, second mortgages or from using high interest rate financing.    

Credit keeps many people from living within their means.  

Then a friend told me he was buying a large house.  

My buddy is a financial genius.  He is someone you never heard of - and he wants it that way.  He drives a modest car and lived in a modest home, both of which he paid for in cash.  Like Warren Buffett, he is more interested in his portfolio than pretense.  He is a self-made success. 

He said that with the housing market depressed and interest rates below 5%, it made good  financial sense to buy a nice house and finance it for 15 years. 

I'm not sure he really wanted a nicer house.  He just saw it a financial opportunity. 

He is rarely wrong and never makes irrational moves.  He got me to thinking again about the evils of credit.  

There are times when credit is good, when it is used responsibly by the people who can handle it. 

For example, take someone in a high tax bracket who is financing a house.  If he borrows the money at 5%,  the actual cost in most cases will be roughly 3%, after taxes.  

If he used the house money for an immediate annuity, he would have the cash flow to pay the mortgage, get the mortgage interest deduction and participate in any increase in value of the house.  (I am assuming that sometime in the next 15 years, houses will appreciate in value again.) In the meantime, the mortgage and annuity rates would stay the same. 

That is a fairly low-risk way to use credit.    

He could also put his money in the stock market and make big gains.  Or lose his shirt.  

There has been a lot of shirt-losing in the past couple of years.

Investing in the stock market can be like going to the race track.  There are going to be winners and there are going to be losers.  People should understand that any investment involves risk.  

In the subprime, “too big to fail,” anything goes market that brought on the financial crisis, some people forgot about risk.

Those are the people that I don’t want to have credit.  None at all.

Many are losing their shirts by paying outrageous fees and interest on credit cards.

Credit cards can take 20% to 30% a year in interest plus really outrageous fees.   Guaranteed.  And you don't get a tax deduction.   

I can't think of a worse investment than that.

I watched so many people fall off the wagon on credit cards, that I bought into the "Just say No" philosophy on any credit.

A pioneer in the "never borrow money"  philosophy was the Christian author and lecturer, Larry Burkett.   In the mid 1970's, he founded a non-profit organization called  Christian Financial Concepts, that used biblical principles in guiding people with their finances.  One of those principles was no debt whatsoever. 

Burkett was extremely popular in Christian circles until his death in 2003 but he never reached a mainstream audience.  Dave Ramsey has. 

Ramsey has a syndicated radio show and a nightly program on  the Fox Business News Network.  Ramsey acknowledges Burkett's influence in his book, Financial Peace. 

Although, like Burkett, Ramsey focuses his attention on churches and Christian communities, he reaches every demographic.  His message of savings and sacrifice and never borrowing money is one that many people need to hear. 

Then I think about my friend.  I am sure his new home is a smart financial move.  

Credit in moderation can be good.  But like any addiction, credit can be the worst nightmare of your life. 

I understand there are some circumstances where a home mortgage is a great idea, but don’t be looking for me in any Capital One commercials in the near future.

Don McNay, CLU, ChFC, MSFS, CSSC is one of the world's leading authorities in helping people deal with “Big Money” issues.

 

McNay is an award winning,  syndicated financial columnist.

 

You can read more about Don at www.donmcnay.com

 

McNay founded McNay Settlement Group, a structured settlement and financial consulting firm, in 1983 and Kentucky Guardianship Administrators LLC in 2000. You can read more about both at www.mcnay.com

 

McNay has Master's Degrees from Vanderbilt and the American College and is in the Eastern Kentucky University Hall of Distinguished Alumni.  

 

McNay has written two books.  Most recent is Son of a Son of a Gambler: Winners, Losers and What to Do When You Win The Lottery

 

McNay is a lifetime member of the Million Dollar Round Table and has four professional designations in the financial services field.

 

 

Follow Don McNay on Twitter: www.twitter.com/Donmcnay

Comments

[dnpvd51]

buying a house because interest rates are low is a huge financial mistake.

The idea is to buy at the lowest price not the lowest payment. When interest rates rise the price of the house will start dropping.

[Eric James]

First came credit to start a war. Then came credit to start a nation. Then came credit to build a nation. Then came credit for another war. And credit to rebuild a nation. And yet more credit for another war. And another. And another. And another. And ever another. Anmd even credit to resuce a nation from its own bankruptcy. Is credit addictive? You bet your guns it is.