Is Credit A Good Tool?

Last week we talked about the personal lessons about credit and debt that are there for all of us to learn from but I also got yelled at.

I was doing a phone in show and a caller told me I was crazy: That credit is a great tool to get rich. His point was if you just get a number of lines of credit from different banks you can buy a home and flip it right away without ever having to put up any money.

Sorry, credit won’t help you get rich. It’ll help you go broke. And ironically, the day after, Alan Greenspan, the former Chairman of the Federal Reserve was quoted as saying that no country can become wealthy through credit.

Merrill Lynch tried that: They were leveraged 33 to 1. That is, for every dollar in assets, they borrowed $33. On the way up, that’s a 33% return when it should have been a 1% return using cash. But on the way down, anything drops by just 3% and their entire assets are (and were) wiped out.

We won’t get it as bad as the U.S., but right now in Vancouver it takes a $700,000 income to service an average priced $900,000 house. That’s not affordable for 95% of people! Something has to give or there just won’t be any more buyers! And that’s an average house!

At some point, incomes have to come way up or prices way down. It’s the same thing as happened in the U.S. and right now, Vancouver condo listings now up 100% and sales down 50% for just that reason. Want to take a guess as to how many people in Vancouver, who bought in the last few years have almost no money down and a 40-year mortgage?

Credit is buying something you cannot afford to pay for. Simple as that. It doesn’t make all credit bad but it’s really great to be a little bit pessimistic when it come to financing anything. A “what if” attitude is a real positive to consider BEFORE financing anything – because afterwards it’s too late – as millions of Americans are now painfully aware of.

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