Sunday, October 12, 2008

A Personal Word - Credit

On a Credit

My parents lived through the depression, but their frugality started earlier. Stories were handed down from their previous generation about family losses when Confederate money became useless. I wonder what my parents would say if they were witnessing the recent financial turmoil.

Many of the financial commentators during the past couple of weeks pointed out that the greatest danger was to the credit system. It seems, nowadays, that is what drives the economy.

My parents didn't believe in credit. They believed in working hard and saving money. If you needed something, you paid cash for it. If you didn't have enough money, you did without until you earned enough to pay cash. They didn't believe in buying anything, as they put it, "on a credit."

In my town, one of the businesses was named Morings Cash Store. Some other stores had "cash" in their policy, but not in their name. Another store was named "Farmers Furniture" as the farmers were the basis of the business. I learned in the '70's that "the times are a-changing" when I offered to pay in cash if the dealer would drop the price. He said "I ought to charge you more for paying cash." Then he told me that they made more money on the charging than they did on the furniture.

There have always been examples of individuals getting over their heads with credit. In the 1970's easy credit caused some farmers to fail, also a few small businesses with SBA loans.

In history, annual loans for farming were traditional. The farmer went to the local bank "to make arrangements," to buy seed and guano.

FHA and the banks made loans to people on their ability to pay. Local bankers were careful to lend only as much an individual could safely manage.

The banks financed cars. There was a hand-me-down system with used cars. A dealer might be involved, but many people went to their neighbor and asked to buy his formerly new automobile as it got older.

Many, if not most families, lived within their means and taught frugality to their children.

Today credit is so much a part of the economy that now we are asked to bail out the credit system, even to protect reckless lenders and overly optimistic borrowers. It's not just the big items, such as house and car, but everything that a credit card can buy. Giving a credit card to some people is like giving liquor to an alcoholic.

I'm a relic of the past, closer to my parents' generation than the spending habits of today's neighbors. I use a credit card regularly, but I pay up every month and never have paid a dime of interest. I've owned only one new car, paid $2,400 cash for it. Over 30 years ago I went to my local banker to finance a small piece of property, just to establish credit if I ever needed it. Other than that, I've never bought anything "on a credit".

I don't expect others to follow my example. Some people can handle credit responsibly, but others cannot.

Easy credit has been a cause of inflation. Easy credit borrowers tend to devalue money. The slower economy of the old days was more understandable to more people.

Economic crashes are not unlike car crashes. Slow, steady driving is more survivable. Those who run 80 mph, like those who over-do credit, are looking for a sudden halt.

When the experts begin to rebuild the economy, they should put in slower credit and plenty of stop signs.

Payday is here. What's next?

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