Credit or Financial Bondage?

When I was in Russia, I often encountered signs at retail stores that read "купить в кредит". The phrase means "buy with credit" or "financing available". These signs were on all types of stores. Clothing stores, electronics outlets, even grocery stores were adorned with the phrase. I remember thinking to myself, "Who in their right mind would walk into a store and use financing to buy a t-shirt or a pair of pants, or their food?" The concept seemed truly insane to me.

After returning home I got on with my life and forgot about the silly signs. Eventually I got married, found an apartment to rent, started school, and became involved with life. That's when, at the age of 22, I was talked into getting a credit card. I honestly didn't understand the concept of the credit card at the time. I knew the fundamentals of the card (an open line of credit that, if not paid off in a set period of time, gathers interest), but I didn't understand what the card offered me that I couldn't obtain without it. I nonetheless decided to keep the card and my wife and I used it to buy groceries and gas. We were good little cardholders and paid it off at the end of every month.

I soon discovered that this good behavior was rewarded with a higher credit "rating". As my credit score climbed, I was offered cards with higher limits. Before long, cards showed up in the mail offering me limits higher as high as $10,000. That was neat and all, but I saw no need for a fancy card. I stuck with my $1,600 limit gas and grocery card. About 6 months ago my wife and I decided to just stop using the card altogether. Budgeting was just easier without the card.

To this day, I still don't understand the justification for using a credit card. I think it comes back to the same voice in the back of my head that asked while I was in Russia, "Who in their right mind would walk into a store and use financing to buy a t-shirt or a pair of pants, or their food?" After all, that is what we do when we use a credit card. We finance whatever we buy with it.

In my opinion, using a credit card, or any form of consumer credit, is like playing with fire. It may be fun, but eventually you will get burnt. I see nothing that you can buy with credit that you can't buy without at a lower risk. To be honest, if you don't feel comfortable buying something without credit, then it's probably not a good idea to buy it with credit.

What does a credit score really get you? More opportunities for borrowing. So we get caught in this cycle where we assume that in order to succeed in life we have to borrow money and pay it back so we can borrow more money later. And so we borrow, and borrow, and borrow. We don't get any more wealthy as our monthly payments grow. In fact, we probably actually get poorer as our payments grow. It seems that the only people who do get rich are the lenders from which we borrow. I just don't get it.

A financial guru I recently discovered by the name of Dave Ramsey says his entire philosophy of how to achieve financial freedom and wealth is based on his observations of what made the wealthy wealthy and what keeps the middle class in the middle. He discovered, surprise surprise, that the wealthy become such by avoiding debt, living within their means, and budgeting their money while the middle class bought into the myth that you have to borrow money to survive.

I personally believe that wealth is actually measured in units of time, not in dollars. That is to say that a person's wealth is actually measured by how much time he or she can survive if his or her active income dries up. True wealth is when your passive income (dividends, interest, etc) outgrows your expenses. At that point, you are "infinitely" wealthy.

For example, say man 1 has $10,000 in the bank. He makes a measly $20,000 per year, but has no debt at all. His utilities, food, and other necessary expenses total $1,000 per month. This man is 10 months wealthy.

Man 2 has $10,000 in the bank as well, but he makes $45,000 per year. It may be contended that he is "richer" than man 1, but he, unlike man 1, has a $1,500 per month mortgage, a $300 car payment, and his minimum credit card payment is $200. I doubt he's unlike the average american. Let's assume that this man's utilities, food, and other necessary expenses also total $1,000 per month. This means that man 2 is a little over 3 months wealthy. Man 2 undoubtedly needs a higher income to support his needs than man 1 does. Conventional wisdom may say that man 1 is poor, but I believe him to be more wealthy than man 2.

Debt is the greatest hindrance to financial freedom. There's no getting around it. Debt, not income level, is what makes people poor. I'm just amazed how many people willingly tie the noose around their own necks.