Society has for decades now promoted the notion of “buy now, pay later.” Madison Avenue has also contributed to this feeling of entitlement by letting consumers know though their clever advertising campaigns that each of us deserves the very best and we deserve it right now, even if we can’t quite afford it. Here, you will learn why we have such poor credit habits, and what we can do to use credit smartly, and wisely.
Why do we have a history of poor credit habits?
Much of this feeling came into play following World War II. The American people had long been denied some of the luxuries of life. Even some basic staples such as oil and nylon for hosiery were restricted as these materials were needed for the war effort.
When the war ended and the baby boom began, so did an era of luxury where everyone was buying their dream home and filling it with television sets and the latest deluxe appliances. Automobiles were catering to the family and a sense of style, and the advertising that went along with these items convinced everyone that they deserved them right now.
Credit has made many good things possible for people who are working hard each day to provide for their families. In many other countries around the world home ownership is only for the very wealthy because there are no mortgage lenders. This so called American dream is one of the best benefits from a system of credit. However, there are many pitfalls when it comes to credit. One step in the wrong direction can not only ruin your credit rating, but could perhaps in the long run, put you and your family out of your home.
Here are some guidelines for getting smart about credit:
Buying a House
The general rule of thumb among financial advisors is that buying a primary residence even on credit is a smart move. Home values normally rise over the long-term and in no time at all you will have created a nice little nest egg. In choosing how much to borrow, banks will often push you to the limit of what you think you can afford. Realistically, you should not spend more than about 25-28% of your income on housing, including taxes and insurance. If you can afford a loan that is shorter than 30 years or make a little extra payment on the principle each month, then you are even better off.
Paying for Education
Secondly, financing an education is a good investment in the future. Your earning potential will eventually outweigh the cost of tuition, and educational loans are usually very low interest. In addition, with most student loans you do not need to begin making payments until you have graduated or stopped going to school. Again, paying it off as quickly as possible upon graduating is the best scenario.
Buying a Car
Finally, your primary mode of transportation to and from work – a car — is an item many people need to finance. It is easy to get caught up in buying more car than you can afford. A new car loan however should be kept under 5 years, and under 3 for a used car. This payment should not be more than 10-15% of your income or you could run into trouble trying to pay for it. Remember also that the higher the price and value on the car, the higher your taxes and insurance will be.
Credit Card Debt
Finally, there is credit card and other consumer debt. This is the worse type of debt of all. Interest rates on borrowing money this way will be the highest of any, mostly because there is rarely a tangible item as collateral against it. The lender can’t take back that expensive meal at the city’s finest restaurant if you don’t pay the bill.
If you must use credit for a vacation, furniture or other seemingly “must have now” items, then the general rule is don’t charge or finance anything you can’t afford to pay off in a year or less. It is also important to pay at least the minimum payment due PLUS the interest payment, or it could take you as long as 30 years to pay for that dinner out!