Ask anyone if credit is free money, and you’re likely to get a response along the lines of absolutely not! But turn the same person loose in an environment where they need to make a major purchase, and they may behave in a way that makes you think otherwise. That’s because the concept of credit as free money isn’t so much an intellectual idea as it is a behavior.
It’s likely that most people are hardly aware that they have been gripped by this mistaken belief. And if it happens enough times, it can land you in some serious credit problems.
How does it come about, and how does it hide from conscious thought?
When the Acquisition is All that Matters – And the 0% Down Payment Fix
When it comes time to make a major purchase – whether it be a house, a car, a college education, or even a vacation – the acquisition is often all that matters. The need or the want is in the driver seat, and financial considerations are pushed way to the back.
In fact in many purchase situations, buyers are more concerned with how much money they’ll have to put up front as the down payment, than they are about the credit implications.
This explains the popularity of 0% down/100% financing that has become so common throughout the economy. Unfortunately, it’s a major component of the credit-as-free-money mindset. I don’t have to come up with any money up front, so I can afford what I want to buy. The truth is, you may not be able to afford it.
0% down purchases are all about making items “affordable” at the time of purchase. In fact, the whole purpose of such loan types is to lower your resistance to making the purchase in the first place. The one-two punch of I want it and no money down can wear down the will of even those who have the strongest personal finance instincts.
The Myth of the “Easy Monthly Payment”
This is another marketing technique that can exist either as a standalone sales hook, or it can be used in combination with 0% down. It often goes by other descriptions including “payments to fit your budget”, “everyone qualifies”, or “your job is your credit”. Vendors use it to weaken buyer resistance, in a way similar to no down payment financing.
I once heard a car dealer say we’re not selling cars, we’re selling monthly payments. That was an eye-opener for me. The whole strategy is designed to sell a car to a customer around the idea of coming up with a monthly payment that will fit within their budget. Given that strategy, selling cars is simply a matter of finding a comfortable monthly payment level for the buyer, and then closing the deal.
The problem with easy monthly payments is that it’s also very easy to accumulate several at a time. Add three or four of these to your credit profile, and you can quickly find that you don’t have enough income to cover them all.
Just Because a Bank Says YES Doesn’t Mean You Can Afford the Loan
Let’s admit it, it’s more than a little bit flattering whenever we get approved for a loan. That alone can lower resistance to buying something that you really can’t afford.
And yet it happens all the time, and people fall for it all the time.
One example is the pre-approved credit card. You apply for the card, and the bank says yes. Another is the preapproved auto loan. You weren’t even in the market for a new car, but the lender says you are qualified for a new loan, and it’s not long before you’re thinking it’s time to buy new car.
Here’s the reality of this arrangement: Anyone who is selling anything major, needs to make loans in order to make the sales happen. The lender, who is usually closely connected to the product vendor, has a built-in incentive to make as many loans as possible.
But just because a lender is ready to approve your loan doesn’t mean you can afford it. Lenders will often stretch criteria in order to make as many people qualify as possible.
Your overall objective when it comes to debt should be keeping it to an absolute minimum. The people who are trying to sell you something – and the lenders that they use to finance those items – have a vested interest in putting you into debt as soon as possible.
You need to resist this invisible force with every fiber of your being. If you don’t, the outcome won’t be pretty.
The Rude Awakening: Finding Out Credit is NOT Free
People don’t get into trouble with debt overnight. It’s usually a gradual process, that happens one loan at a time. For all of the reasons listed above – 0% down payment offers, low monthly payments, and banks that say “yes” – it’s easy to fall prey to the trap.
But fall enough times, and you’ll be in a situation where you can no longer make your multiple “easy monthly payments”.
This is the point at which most people realize in the most certain terms that credit is not free. Understand that sellers and lenders stand to benefit richly if they can convince you that credit is free – if only by subliminal messaging. But in the end, all debt must be repaid. And that’s when the true nature of credit becomes completely obvious.
Cleaning Up the “Free Money” Mess
If you’ve gotten too deep into a debt trap, it’s likely that the credit-is-free notion somehow seeped into your mind. Don’t blame yourself for that completely – you had a lot of help getting to that point by the good folks at the car dealership, the real estate office, and the college finance office.
But rest assured, it will fall on you and you alone to clean up the free money mess that you find yourself in.
You can try to deal with this, one creditor at a time. But that can take years, and quickly turn into a part-time job. In the meantime, it’s likely that your credit will deteriorate. As it does, your options to refinance the loans will grow slimmer.
When you reach that point, it’s time to get professional help. Your best source of that help will be a competent credit law firm will not only help you get out of debt, but will help you do it as quickly and cleanly as possible.
Creditors have gotten smart, and they often have the law on their side. If you hope to win this battle, you will have to level playing field. Doing it as early in the process as possible will make it all work better.
And once you get out of your credit and debt problems, vow to never again allow the idea that credit is free to enter your mind. That will be your best defense against a repeat episode.