Debt sucks! So use credit productively.steemCreated with Sketch.

in Project HOPE2 months ago

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Debt, what is it good for...?

Absolutely nothing. Debt is a terrible vulnerability, especially in the bad times. Mostly because it saps future earnings and spending when we need it the most.

Credit however (purchasing power), the productive use of it, is good. But, once that credit becomes debt, it becomes a liability and we have to pay it back (sapping future earnings). That is why we have to use credit productively, because the income generated from that "credit purchase" has to exceed the debt service payments, so we can pay off the debt principle and increase our income or net worth.

Unfortunately, most credit is not used productively. One of the big reasons why is people don’t consider credit as valuable as money (earned from income).

Credit is cheap, easy and fast...

We all know, whatever is cheap, easy and fast, we don't value as much, like credit. Income however, is hard to obtain. Just ask my asshole boss who didn’t give me a raise...just joking Bob :) Since my income is harder to obtain, I place more value on it, because what is more scarce, demand being equal, is more valuable.

If it takes me 4 months to save up $1000, I am going to be very very careful how I spend that money. Because it's going to take me another 4 months to save up again if I blow my money on stupid stuff. Money earned from income is valuable in time and energy.

Credit however is easy. It doesn’t take any time or energy to obtain. If I have access to thousands of dollars of credit right now, I don't have to wait. And if I blow the money that I got from credit, there's more credit where that came from. Plus, I don't have to pay it back right away, I can have $10,000 of debt on a credit card, and only have to pay $25/month. This encourages impulse buying. But that unproductive credit turns into unsustainable debt. And eventually, those lenders come to collect!

Consumer spending accounts for 70% of US GDP.

Consumer spending is mostly run on credit. Politicians, corporations and even your neighbors (either directly or indirectly) encourage consumption through credit saying this is the surest path to the American dream. Even going as far as saying that “consumption” is actually an “investment,” to justify the debt for a house, car, education and/or a business. Even though you should never borrow for an investment.

World economies grow and run on credit and debt. That is why governments encourage corporations to use credit...and corporations encourage the people to do the same. It is ingrained in all of us. But when a recession or depression does happen, because we deleverage unsustainable debt, the people that make-out the best are the ones that have little or no debt, and a healthy emergency fund. The pandemic reminded us of that.

The bottom line, use credit sparingly and productively. Even though credit could potentially get a person to their destination faster (student or business loans), unsustainable debt (credit used unproductively) could lead to financial hardship or bankruptcy if debt service payments exceed their income, which is likely to happen in a bad economy.

Stay frosty people.

50% to ph-fund

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Hello @fijimermaid
Many people are afraid of credit to make a business, but they can get into credit to buy phones, televisions and furniture, those are things that I have never finished understanding, but it is the reality.
A well used credit can be a great salvation for many, or literally, a curse, if they do not know how to use it.
Good post.

Hello friend, it is a controversial topic, but if you make good use of the credit and put it to work there is nothing to worry about. We need to have more assets and less liabilities and then the debt will pay itself off. We just need to have some knowledge about it, think intelligently and not like common people. Greetings.

Nobody loves debt but truth be told you can't deal without it at times. You have to be careful not to run into such act because it is not good and when it comes to business make sure that you put your credit into good use.

"Credit into good use."

Totally agree.

Yes I agree with you debt sucks , but we need to in limit if we are opt for credit , credit is good but we need to follow some rules in credit more credits then slowly create to big debts and we cannot come out of that very easily. So always try to spend that much you can afford in life.

"So always try to spend that much you can afford."

I wish more people in the US would follow this rule.

 2 months ago 

Dear @fijimermaid

It's quite and old post so I'm not even sure if you would read my comment. Hope you will :)

You're saying that debt isn't good for anything. And to some degree I would agree with you. However ... would we witness any economy growth without debt? I often wonder.

Perhaps from macro-scale point of view debt is a necessity?

Also morgage = debt. And getting morgage in times of high inflation can be one of the easiest way to pay off that morgage. Since value of debt is decreasing (in times of inflation). Wouldn't you agree?

If it takes me 4 months to save up $1000, I am going to be very very careful how I spend that money.
Credit however is easy. It doesn’t take any time or energy to obtain

I actually disagree with you. Based on my own spending and experience (watching others) I would say that people spent their own earned money very easily. But they think twice before they will create more debt. And if they are forced to get into debt -> they will most likely be very careful with spending those money.

Interesting choice of topic. Upvoted already :)
Cheers, Piotr

“I would say that people spent their own earned money very easily. But they think twice before they will create more debt.”


I agree that when people go through the decision-making process, they are wary of debt. But people's actions do not back up their thoughts and words. I posted this to explain the psychology of credit/debt.

The data suggests that debt is exceeding income earned as debt becomes less expensive to maintain (lower interest rates). People are spending credit easier than they are they're own money earned. Here is some data that I’m going to put in a future post.


In 1983, the federal discount rate was 8.50%, which made debt a lot more expensive than it is now. At that rate, American households on average had a debt to income ratio of 55%. Fast-forward to 2019, with a discount rate of 3%, the debt to income ratio was 160% for households. That means households have 160% more debt than they have in annual income. Credit seems to be used at a higher velocity, even as savings rates have increased in the past 16 years. People are conserving cash, but using credit.

https://fred.stlouisfed.org/series/INTDSRUSM193N

https://www.stlouisfed.org/~/media/files/pdfs/hfs/assets/2017/moritz_schularick_the_great_american_debt_boom.pdf

https://www.newyorkfed.org/microeconomics/hhdc.html

https://fred.stlouisfed.org/series/MEHOINUSA646N

 last month 

Thank for being so responsive @fijimermaid

I agree that when people go through the decision-making process, they are wary of debt. But people's actions do not back up their thoughts and words. I posted this to explain the psychology of credit/debt.

Perhaps it's cultural thing. I live in Poland (east europe) and it has been drilled into my brain (and most people around me) to always build savings. To never spent more than I earn.

Access to credit has been difficult here (until we joined EU) so it may be the reason why our mindset here seem to be different.

People are spending credit easier than they are they're own money earned.

Borrowing money to spent on consumption seem to be super rare here. And idea of having financial buffor is something we're all learning even when we're a kids. (at least my generation did).

So ... my experience with debt seem to be slightly different.

"Perhaps it's cultural thing."

That is a very good point.

I'm also not considering other economic and political dynamics. Where a nation is economically speaking, fiscal and monetary policy, where they are in the debt cycle, etc... Whether the former and current generation had to go through hard economic times. After the Great Depression in the 1930s in United States, people were very wary of using credit and didn't start really using it until the 1960s.

I should probably be clear that my post are US centric, because the data that I post is US centric. And ask questions about other people's experiences and how they view credit and debt.