The simple definition of credit is borrowed money and all forms of credit which one takes are debt until paid back in full. The cost of obtaining credit to purchase appreciating assets such as property are considered worthwhile as very few have enough cash on them to purchase a house outright and thus need to borrow. However it is generally the case that the costs of borrowing to finance a house purchase will be reflected in the rising value of the property.
Credit is increasingly used these days to buy an education, a very expensive outlay. One can weigh the cost in advance and determine if student loans to finance college will be a good investment by estimating the potential increased earnings having a degree will bring. However student loans often end up being a burden which graduates carry for years, having invested far more in their education than the monetary returns their degree brings.
Borrowing massively for an arts degree with no profession waiting to offer a high salary can mean the cost of borrowing balloons out of control and the resultant debt was a huge mistake in retrospect. Others use their education wisely and obtain professional qualifications which guarantee them a substantial earning potential for life.
The true cost of credit really hits home when it is used to finance day to day expenditure as amply illustrated by the profligate use of credit cards. A huge sector of society has become trapped with credit card debt and the true cost of this is often far more than the monetary costs. When a family becomes trapped in debt, be it credit card debt, loans or mortgage arrears, then often the true cost is shown in human terms. High levels of unmanageable debt can lead to loss of homes, marriage breakdowns, depression and even suicide.
The reality is that most forms of credit which lead to this fund lifestyles which are beyond the consumer’s means to support. A simple change in circumstances can see their whole life fall down like a pack of cards as it was supported by the flimsy structure of borrowed money. Interest rates applied to all forms of credit can be extemely high, though those who use credit well are able to obtain preferential rates.
Age old wisdoms of borrowing have been discarded in the race for ease of obtainment. Mortgages obtained with low down payments which give the home owner little equity value but leave them overextended on monthly payments are a sign of both irresponsible lending and borrowing. Financial obligations should not be entered into lightly without a full understanding of the product used and the consequences of failing to deliver on payments.
The simple absurdity of borrowing to pay for more house than one can afford and then furnishing it with loans and paying for day to day living on credit cards is bound to end in high costs. It is simply unsustainable, as many have now discovered.
The true costs of credit are high when not managed responsibly and when taken without full understanding. It is time that the younger generation were educated in fiscal responsibility and thus learn to avoid the downfalls and high costs of using credit.