Thursday, July 13, 2006

Credit

This is clearly both a good and a bad thing. The United States is probably the credit capital of the world, as in the place with the the largest number of people having the greatest amount of debt owed to creditors. The statistics for that country indicate the average credit card debt per person is over US $10,000--probably nearing Dhs 40,000. (Of course I am always confused with statistics such as these about who is being counted. Does the figure include babies?) Whatever the case, there's a lot of debt in the USA.

It's credit card debt that is the most worrisome because the interest rates and fees are so high. As the UAE quickly becomes a society of convenience and with a country like the US providing an economic model, problems like credit card debt increase. You love 'em and you hate 'em. In the end the convenience of credit cards is irresistable. On the other hand there is no doubt that you spend more because of them--much more.

The good thing about credit is that it funds things that are important or necessary which might otherwise not be attainable. For renters in the UAE for example, it enables one to pay a year's rent or several months in advance. How could one manage if he or she were without the cash and and had no access to credit? The same goes for property and car buyers. After, these essentials, however, reliance on credit becomes debatable.

It is probably up to each individual to prioritize what is a justifiable expense to meet through credit. If one makes the effort to do that, then he is well on the way to managing credit and debt responsibly.

What about education--when is it OK to borrow money for learning? Will the outcome of such study place one in a position to better meet one's future expenses?

Health care is another example. Of course it may be unavoidable to pay for accute care through credit when funds are short, but what about so called elective treatments, say an unscheduled physical exam, dental work, exercise or other physical therapy? When is it OK to pay for these with credit?

What about insurance? Some insurances may be more essential than others. Most can be easily deferred when one does not have sufficient cash, but when might it be more prudent to use credit?

The choices are many. It isn't easy to make the most responsible ones. However, with things like daily shopping and non-essentials, discretion needs to be the order of the day. One should simply not pay the restaurant or hotel bill with credit card if one's debts are mounting. Hotel bills particularly, if paid in cash will make it all the more apparent how extravagent such an expense is, unless one really can afford it. Instead of paying one's bill at the end of the stay, why not settle it on a daily basis to gain more control?

The Final Analysis

A lot of people in the UAE hate the banks, I'm sure. I hear and read of a lot of complaints. But that doesn't stop most of us from taking advantage of the various offers of credit. It is becoming all too easy in the UAE to fall into the debt trap, in the same way that Americans have. The advant of mortgages recently have just created one more opportunity for UAE residents to chain themselves to debt.

The point is to simply behave responsibly. Credit, I suppose, might be compared to a powerful driving machine. Placed in the hands of the immature and irresponsible it is a potential death trap. To the mature and responsible, however, it can provide a great amount of convenience and pleasure.

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4 comments:

trailingspouse said...

I think in today's society credit for major purchases like houses & cars is as inevitable as death and taxes, however credit cards invite us to play with fire. Unfortunately it's really hard to avoid them, particularly if you travel - try checking into a hotel or renting a car without one.

I do think more should be done to educate school students about basic money management. Most of us have to learn about credit and investing "on the job" and in today's increasingly complex world few people really understand what they're getting into.

BD said...

Two great points. The system is set up to encourage people to be fiscally irresponsible, as there is profit to be made at the expense of wasteful spenders--which turns out to be just about everyone in consumer driven societies.

And schools would be a good place to start teaching such things. Schools for the most part just miss the mark. They are basically stagnant institutions which don't know how to evolve to meet the current needs of society.

Grumpy Goat said...

It's not just credit cards that are a problem. How many times are we confronted with an advert to "Buy a new car for 'only' Dh1500 a month"? At no point does the advert go into the details of how many of these monthly Dh1500 payments will have to be made.

The UK (I don't know about other countries) has been forced to clean up its act in recent years. Punters have to be told how many repayments, the total amount, and crucually the Annual Percentage Rate - APR - that will enable Fred Bloggs to compare like with like when offered a bewildering array of financial offers when he's buying a car, dishwasher or house.

My UK credit card statement includes estimates of how much I will owe next month if I only make the minimum repayment. Oh gosh, I'll end up owing the same as I do now or even more.

But try to get that into the minds of those who are less financially astute. It is all too easy to forget that plastic cards are real money, just like the paper crinkly stuff. Trailingspouse and bd are both in agreement with me in that home finance should be part of the basic school curriculum.

BD said...

I agree GG. Government should step in and protect the public from over aggressive and somewhat deceiptful advertising. Although it's nice that consumers have choices and options, too much consumerism hurts society, and in many countries we're approaching this extreme.

There was an interesting BBC radio broadcast recently depicting a world in the future suffering from an Orewellian version of consumerism. (I'll try to find a link.)