Debt and Credit, Confident or Not?

“Will that be debit or credit?”, says the cashier as the customer instinctively answers, “Credit please, I need the miles”. The harmonious nods indicate the camaraderie of a goal, desire and method of transportation. .Exchanging pen, plastic and carbon reinforce the agreement[1], as defined by Merriam-Webster. The kibitz exchanged has now been executed; both parties exit such chatter with a token of their common ground; the customer’s ability to view Monday Night Football on the latest LCD Flat Screen and the cashier with further assurance of job stability and hope of keeping up with the Jones’. After all, the John Hancock ensures confidence[2], right?

According to the article, Managing Debt and Credit, credit was once defined as “Man’s Confidence in Man”. But in fact, the definition of credit today is more like “Man’s Confidence in Himself” (aka having trust in your future ability to pay that debt) (Yahoo! Finance, 2010). Although the concept appears to be accurate, the actuality of today’s less than favorable economic conditions coupled with future conditions encompassing Baby Boomer statistics; confidence and credit adjoined in meaning could likely be a thing of the past. Parents of Baby Boomers represent a generation of The Great Depression in which paying cash for all purchases, even the big ones (homes and vehicles) was prevalent as well as a sign of noble and wise money managers. They worked hard, saved money and consistently made choices of never spending more than you earn. Essentially this could be viewed as total avoidance of debt and credit. So what happen to that?

The era of instant gratification, going with the flow and keeping up with the Jones’ became a way of life therefore debt and credit came down one’s confidence in himself. Baby boomer’s are primarily responsible for molding the benefits and downfalls of both installment debt and revolving credit. Installment debt refers to money borrowed for a specific period of time (aka maturity date) with payments being made at regular intervals to include both principle and interest. Depending on terms of the note (and the pool of funds the institution lending utilizes), interest can be paid at the front end or back end of the loan, most are front end therefore principal balances decline more in the final stages of the note. Competitive interest rates, average range of 5%-10%, are typically amortized over the life of the loan with fixed payments remaining constant. (Yahoo! Finance, 2010) Installment debt is widely recognized as the instrument in which homes, businesses, and cars are obtained (large ticket items) however, installment debts can also be small loans, secured or unsecured, utilized to either cover an unexpected expense when liquidity is minimal or a tool in which credit can be established and built on. Baby boomers recognized the higher rate of return by obtaining installment debts and the positive impact it has on a portfolio. Tax benefits freed additional monies to reinvest elsewhere such as the stock market, in which they molded as well. Those over 50 control four-fifths of the money invested in savings-and-loan associations and own two-thirds of all shares on the stock market (Celent, 2003).

 

 

TO BE CONTINUED.....

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[1] Agreement: a contract duly executed and legally binding

[2] Confidence: faith or belief that one will act in a right, proper, or effective way