My Uncle owns a furniture store in Alor Setar, Malaysia. This isn't particularly remarkable, except it was also where I spent most of my swelteringly hot summer holidays, cooped up inside the only air conditioned place in town, the office. This was where I learned the basics of credit.
I can vividly remember the stale smell of the off white wall paper, the cool bare polished concrete floor and the rhythmic rattle and hum of the twenty year old air conditioner, beating time to my 'busy office work.'
In the corner, on the ground, sat an odd looking print.
The vignette was made up of two contrasting scenes, one was a large, rosy cheeked, coated business man smoking a pipe, and the other, a poor skinny man with an empty safe. The motto on the fat rich man:
I never sell on credit.
Poor old skinny with his empty pockets proclaimed:
I sold on credit.
At 7, I had no idea what credit was. Over the years I spent there though, my parents taught me that selling on credit was a way of letting people have things now, while they could pay for it later.
Fast forward nearly 20 years, and the world is drunk on credit. Buy now pay later. Use your home equity, buy a new car. Borrow to get that whizzbang doohickey you always wanted. No money? sure we'll loan you 100% of the value!
It's all 'cheers, how you doing' when wages grow and assets appreciate and the gen X'ers cash their retirements out on their homes. But what happens when the party is over?
Well. For one, when no one wants to lend you anymore money, things start going awry.
Then you wake up. You've got a hangover, but you're not sure how you got to that point.
Sounds like drinking too much right? Well it's exactly what's happening now with Subprime (it's not over yet!). People went too far with selling on credit.
Everyone who sold on credit is now the skinny dude saying I sold on credit. The scary thing is, that they aren't so skinny, and aren't so easy to spot, they are your average white collar, suited, mom and dad. In fact, if they were there during the party, they've probably cashed out their bonuses and left shareholders (hrmm moms and dads too) out in the cold.
Here is a hilarious primer on the subprime crisis (retold by two stick figures, no less) that I totally recommend, it'll take 2 minutes:
Personally I've got a different view of credit. It's not about selling on credit. It's about the uses.
Credit is for:
- Buying an asset.
- Buying something that helps you make money.
- Buying something that keeps you living.
Credit is not for:
- Getting that xyz that I always wanted, and is on sale.
- Buying stuff for fun.
- Betting on the market.
- 'Getting the lifestyle I always wanted. Man'
These are my own little rules, I'd love to hear yours.
My hope is that these rules make sure, unlike most of the Financials right now, that I'll never be caught with my pants down.
Flickr cred: Regenade98