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.