From an early age we as consumers are often taught wise phrases such as, "a penny saved is a penny earned" and "waste not want not." Many children are taught the rudiments of a budget, risk, and delayed gratification with an allowance. Such simple lessons these are that if learned well can lead to a lifetime of wise credit choices and sound financial growth.
Watching the news a few days ago I could not help but wonder when such simple lessons were thrown out as the analysts discussed the impending $700 billion bailout plan. Regardless of your position on whether or not the bailout should proceed, there are some lessons that we as consumers can learn and apply from the current credit crisis.
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Bad Credit Risk Assessment
As consumers, we are faced with numerous investment and purchase choices on a daily basis. We ask ourselves, "Is it a better choice to consolidate my credit balances onto a single credit card" or perhaps, "Will this car loan help me rebuild my credit or is it a better decision to lease my new car." The credit crisis facing the financial industry today boils down to one of risk. Mortgages, credit lines, credit cards were being given too easily, too freely, to the riskiest of borrowers. Urged on by many factors, the fact remains that many of these household financial institutions now carry too much high risk debt on their balance sheets. Studies continue to show that we as consumers are much like these failing companies, in that we have borrowed too much against investments that are not providing the financial return to help balance the books.
The lesson learned is we need to better balance our bad credit debt and tighten the belt of our spending habits. We as consumers have been a little to free with our credit towards purchases, and must work towards paying down this bad credit or face similar insolvency. Make the attempt to reduce credit spending to items of vital importance and shift a larger percentage of spending to cash. Clean up your personal balance sheet and reduce your bad credit exposure.
The $700 Billion Cash Advance - Payday Loan
Throwing more cash at the problem reminds me of a cash advance or payday loan for people with bad credit. Presidential candidate John McCain likened the bailout plan to a "tourniquet," suitable to help slow the bloodletting but not a solution. Instantly I thought of a bad credit consumer who is forced month after month to use the high cost option of a cash advance against their paycheck as a way to make ends meet. A personal loan is an excellent means of solving a short term cash problem, if there are no other low rate alternatives, but it does not prevent the need from arising again if spending and budgets are not brought under control.
There is much at stake with your credit situation, finances and your future. Improved credit will lead to greater savings and greater credit program rewards. Really bad credit is a situation any company, or our government would wish to find itself embroiled, nor would any individual consumer. But unlike the current situation in Washington and Wall Street, we as credit consumers cannot depend on a blank check or a bailout when we find ourselves in financial crisis.
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