Wednesday, January 4, 2012

The Credit Trap

During the next several weeks, I’m going to address some of the many financial pitfalls you can get yourself into without thinking of how you will destroy your entire financial future.

Let’s go back to the present cost of money to banks and other financial institutions.  Remember that yesterday I described the present low cost of money to all financial institutions.  I would think everyone would understand that if some commodity is cheap, you can sell it at a reasonable cost, make a reasonable profit and everyone will be happy.  Not so with the present structure of the credit card business that wants every last nickel it can get from its customers.

If the financial institution is paying 1% for money – if there are no usury laws, and if the American public never thinks of the cost of an item but only thinks of the amount of the monthly payment to purchase it,  the institution can create a financial scenario where the borrower will pay a monthly payment forever, regardless of the real cost of the item.

I have friends who have bought cars without caring about the price of the car, or the interest rate they would be charged on the amount of the car loan, as long as they could make the monthly payments, even if the monthly payments lasted forever.

Many people, possibly most people, have no understanding of money, especially the cost of money.  They get on the monthly-payment merry go round and they can’t get off.

If you tell yourself, so what – I’m not the one running up the credit card interest rates because I pay my balance in full every month, you failed to understand the problem.  When your neighbors have fully transferred all their wealth to the financial world, your world is also going to collapse.  The overextension of credit destroys an entire economy or at the very best, it transfers wealth to those who have money.

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