The Lure of Credit
It’s something that most of us experience at least once in our life, and often multiple times. If it’s not carefully tempered with a dash of wisdom, it can be a fiery moment of joy that leads to years of struggling and regret.
What is it? A moment I’d like to term “The Credit Burst”.
The Credit Burst
For many, it comes at eighteen – that moment when the wider world turns around to us and says ‘you are now an adult, go forth and make mistakes!’ - for others, it marks the start of a new job, or some other significant life event.
Suddenly you are entitled to credit where you weren’t before!
Depending on your situation, that credit may be a few hundred, or it may be hundreds of thousands, but one thing is for sure – it’s more money than you would otherwise have access to, and marks a sudden ability to get all of those things you’ve always wanted.
New clothes? New TV? New computer? Three piece suite? Holiday? New car? New house?!
The list of things your mind insists that you need is staggering – things you have been living without forever, which suddenly you desperately need right now.
Being offered credit can feel like winning the lottery. It’s going to dig you out of that hole you’ve been stuck in, offer you a new lease of life and get you everything you’ve been dreaming of.
Done right, that can be true, but bad money management can turn that exciting credit burst into years of regret, so take care to think before you sign.
Credit Used Correctly
Remember that ‘dash of wisdom’ needed to temper the urge to overspend? Well, if that’s prudently applied here, then getting credit when it becomes available to you can be the perfect way to rearrange and streamline your finances.
Clear existing debt
If you are currently paying off anything else, look to clear that before adding to the pile. Many personal loans can be used as debt consolidation, with a little extra on the top for those purchases you were hoping to make. If you can, avoid piling new debt on top of old debt – doing so leads to struggling and despair! Manage your credit and don’t let it cascade out of control.
Don’t buy anything that isn’t necessary
There’s nothing wrong with flippantly buying things when you can afford it. Want a new silly hat, or a box set of James Bond films you’ve already seen? Not a problem when the money is available. Putting a frivolous purchase on a credit card or using up some of your loan for it can be a lot more damaging. Plan your purchases and keep overspending to an absolute minimum. Honestly, no one needs that much 70s and 80s spy drama!
Whatever the plan was – new car, some furniture, an impressive number of liquorice allsorts – don’t deviate unless there’s a really genuine and solidly logical reason to do so.
Don’t take out more than you need
If you have a plan for a £5000 loan and you are offered £7500, don’t just take the extra money because you can. The difference in paying it back can be as much as a year or more. Remember – this isn’t a lottery win, it’s an arrangement which must be returned in full and with interest.
Do check the details of any loan, as some companies will have thresholds where the interest becomes significantly cheaper (for example, a rate if you borrow £6000 or more that is considerably lower than the standard for £5000). If this is the case, then the slightly larger loan is justified.
Discuss it your partner
If your finances are tied with another, be sure to discuss any credit with them before you take it out. Open and honest discussions will ensure you are both happy with the end arrangement, and can highlight alternatives you may have missed. Never make large financial commitments that can affect another without checking with them first!
Exchanging years for cash
At its core, credit is a way of swapping time for money – you get the thing you want now, but you pay more for it in the long run. It is an enticing draw for anyone lacking patience, and sometimes taking a step back and really evaluating your needs can do a lot to prevent any bad credit decisions.
There are definitely situations where credit makes things possible that would otherwise be completely out-of-reach (for most of us, the idea of saving for a house in full and avoiding a mortgage is just ridiculous), but often a little patience can make for a better investment. Consider putting the money aside each month instead of spending it now and having to pay it regularly to the bank - see what a difference savings can make to your life.
It’s worth remembering though, that eventually time will work in your favour and, if managed properly, your credit will be paid off.
Letting the Joneses do their own thing
It’s important to remember that your credit needs are your own – don’t try to use credit to impress or to ‘keep up’ with others. Rather than trying to ‘Keep Up with the Joneses’, let them do their own thing while you get on with yours.
A recently released study by the Federal Reserve Bank of Philadelphia looked at the effect of lottery wins on neighbours in Canada and showed, somewhat shockingly, that those who lived close to someone who had a sudden windfall would drive themselves into debt in an attempt to match it.
It’s simple really; someone near you seems more financially successful and the base emotions of envy and greed (and even those of pride and inadequacy) trigger to make you do whatever you can to have the same - even if that means making poor credit decisions.
So avoid lottery-jealousy and don’t measure your success by others!
Enjoying the Burst
Credit isn’t all about careful planning and predictions of doom, however - there is a definite sense of fun to be had when being allowed to just splurge a little without worrying about it. The Credit Burst represents a moment when you have reached a level of financial stability such that you are offered this opportunity – remember, the banks and credit companies have avoided lending you the money to this point, so it’s a change that they see represented in their trust in you.
Have a little fun with it!