Thriving without a credit card

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The Crash of 2008 may introduce two ‘game-changing’ behaviors into the US consumer credit and home mortgage markets:

The Crash of 2008 is restructuring the availability of consumer credit as well as household spending and saving habits.

1. Restricted availability of consumer credit and home mortgages:  The sins of bankers in granting sub-prime mortgages are well-known.  Fannie Mae and Freddie Mac, the prime promoters of undeserved mortgages, are in financial extremis, with greatly reduced capacity to flood mortgage markets with bad loans. Pressure to reduce leverage of financial institutions, in general, is already reducing availability of consumer credit. Lack of confidence in credit rating agencies also restricts the supply of consumer credit, especially credit card debt bundled into asset-backed securities.  On top of market forces, we have new regulatory provisions which, through a variety of means, further reduce incentives of finance companies to offer credit to less credit-worthy individuals.
   In this article:

   • Save or Spend?
   • Living debt free
   • When will the recession end?
   • Related Posts
   • Comments (1)

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2. Reduced demand for consumer credit: A high level of unemployment, expectations of a delayed recovery, lack of confidence in the fiscal responsibility of a Democratic Congress and Barack Obama, reduced household wealth and need to rebuild retirement reserves after the Crash of 2008, and publicity of under-funding of public and private pension plans — all these factors have induced households to reduce spending, increase savings, and cut back use of consumer credit.

Save or Spend?

Anyone who was born in the United States in the 1930s or 1940s, is aware that it is perfectly possible to live a normal, happy life without a credit card and without a home mortgage that absorbs more than 20% of one’s monthly budget.

People born after the 1970s, are likely to have had access to credit cards since college and are accustomed to living with a high level of personal debt.

The popular radio and TV host, Dave Ramsey (see clip), has made a successful career of encouraging people to get out of debt, cut up their credit cards (which he calls a ‘plascetomy’) and, in so doing, has provided an extremely useful public service.

I was born in the Great Depression and never had a credit card until I was in my forties and director of a bank. I’ve never had a home mortgage nor bought anything on credit. I do use a credit card for convenience in shopping  and when traveling, but never have paid one cent in interest to a credit card company.

I believe that you save more by renting a home than owning one and by saving to acquire things rather than buying on credit. I figure that over the years, I’ve saved hundreds of thousands dollars in interest charges by these practices, which has allowed me to live better on far less money, and — most importantly — without the worry or stress of having debts to pay for things I’ve bought, used, and discarded long ago.

Living debt free

Now, many people of my generation have grown up with credit habits similar to mine, not due to any superiority of character, but rather because this was the way we were brought up.

Living debt free permits a much richer life style on the same income.

You couldn’t have a credit card before the 1950s, because there weren’t any.

You couldn’t buy a house with no money down, because no bank would offer such a mortgage.

Stores had what they called ‘lay-away plans’ which consisted of the customer going to the store each month to deposit money to buy a certain good that was ‘laid away’ to be delivered when payment was completed. The store guaranteed the price and availability to the customer, ran no credit risk, while the customer received the goods without paying interest.

If you think about it, you’ll realize that once you get started with this system, consumers are able to acquire more goods for the same amount of money. Industry and commerce benefits with increased sales, while banks lose the interest that might otherwise  be received on consumer loans.

Banks, themselves, had a sort of ‘lay-away plan’ with Christmas Clubs, which usually consisted of a piggy bank or special account that a customer could use to save money to buy presents in the Christmas season. (Nowadays, some banks might even consider it politically incorrect to offer such plans, lest atheists be offended.)

When will the recession end?

If we are, as I suspect, indeed in the midst of a Great Recession that will last beyond 2016, it is possible that the combination of credit restrictions and a greater propensity to save will bring about a healthy change in consumer behavior that will allow millions to live better, with less credit worries, while reducing financial risks on the system.

Changes in saving-spending habits evolve slowly. The Crash of 2008 may lead to a long recovery and time for societal changes.

Changes in economic behavior of this magnitude take a long time. Baby Boomers who are accustomed to immediate gratification offered by credit cards are not likely to change life-long habits.

However, Baby Boomers are moving off stage and the following generations are showing signs of a return to more cautious behavior.

If recovery is delayed to 2016 or beyond, there will be plenty of time for most households to reinforce their financial positions and adapt their spending habits to the new reality.

Once (and if)  this happens, an important element in the economic ‘reset’ or ‘game-change’ will be in place, allowing the Good Times to roll again.