The recent economic collapse has pointed out that while credit can be beneficial in limited circumstances, it is also an extremely dangerous item that encourages people to live beyond their means with an illusion, backed by debt, of wealth. The main dangers of credit are that it 1) creates an illusion of wealth; 2) promises a brighter future; and 3) justifies impulsive and irresponsible spending.
The most dangerous part of credit, particularly easy credit, is that is creates an illusion of wealth. Credit, especially credit cards, gives an individual the impression that he or she is able to afford more than he or she actually can. A couple that has a combined income of $100,000 for a year really has $100,000 to spend in a year. This must cover food, clothing, housing, and any other items that are necessary or wanted in the year. But, when a credit card is thrown into each wallet with a limit of $10,000, the total amount of spending power the couple has has been increased to $120,000, for a time. This has increased their spending power by 20% and yet their actual income has not increased at all. This has created an illusion of wealth that is damaging to the couple's psyche as well as their longterm financial health.
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Next, credit promises a brighter future. The entire credit system is dependent on a lender's ability to lend and a borrower's ability to repay the lent money to the lender. For credit really to be useful and occupy a good place in an economy, the borrowers must be able to repay their obligations to the bank. Credit promises a brighter future by somewhat misleadingly promising individuals that yes, it is tough now but the future will be brighter because you have new things and no more payments to make.
The final problem with credit is that it justifies and even encourages impulsive and irresponsible spending. By making large sums of money available at a person's fingertips, literally, individuals are encouraged to buy things that they really cannot afford. This encourages not only buying things that aren't needed but buying things that are above one's means simply because one can "make the payments." While making payments is good, it is not necessarily putting a dent in an individual's total amount of debt.
Credit, despite all of its risks, can be useful if it is used correctly. It makes it possible for people to buy a home (as long as they do so responsibly, this is ok) or a car. Few people are able to put down 100% cash for either of these purchases and so credit is something of a necessary evil.
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