June 26, 2019
Some companies regard customers who use their credit facility as “Super Customers.”
Super because they spend more than “cash” customers. Super because they increase the company’s profit margin on every item they buy. Super because the more debt their customers get themselves into, the better off the company is.
It all comes down to a thing that is equally good and evil – compound interest – a simple algorithm that illuminates three vital truths:
Good financial situations get a lot better
Bad financial situation get a lot worse
Whatever your situation, get on top of it now.
Once upon a time British banks were respected places that encouraged us to save and were very sensible in how they loaned money. Bank managers were once held in high-esteem, now they have lending targets and we have fear of missing out.
New car? Sure you can afford it, we offer finance!
Consolidate your debt with some more debt? Of course!
Brands and their advertising make it easier for us too. New sofa? No problem, pay us in four years time!
UK consumer debt stood at £1.443 trillion in 2015.
Jessica is a 23 year old woman, with her financial life stretching out ahead of her but she can’t see it. She is so busy trying to recover from bankruptcy. Her 18th birthday came with alluring messaging of ‘having everything she wanted' in the form of credit from online clothing websites.
First she was offered £1,000 worth of credit, which she took with glee. When that had evaporated, they offered her another £500 and then another. Soon she realised that after her long days at dance college and evening shift work, she couldn’t pay her debt to the retailer, so she applied for a bank loan to pay some of the debt.
The bank readily gave it to her but it wasn’t enough so she started taking out payday loans. Soon she felt the world closing in around her. She was alone in her crushing anxiety knowing she had been really stupid.
She phoned a national debt advice line, they comforted her but they couldn’t make the problems go away and the interest she was paying grew day by day.
One day, her Mum opened one of the increasing number of threatening letters that were tumbling through the post-box, she was livid. How could her daughter have been so naive?
And the shame of it all, is not that she bought the things she wanted, it’s not even that she really couldn’t afford it, it was her lack of understanding of the cost of money.
Money costs money, it’s the most expensive thing there is and the longer she took to pay it back, the more it was costing her.
Everybody is familiar with the concept of the snowball gathering momentum and size as it tumbles downhill. The difference is the snowball of debt as it grows, never, ever melts, it rolls and grows eternally.
There are so many things in life, like Jessica, we all could have done differently and sometimes all of us need to just say, what the hell. But when we say it, we must know at what cost.
Of course houses are bought on credit but using credit to buy the day-to-day stuff, or the month-to-month stuff, or year-to-year stuff, or the what-the-heck-stuff is the falsest of false economies - because there will always be a reason not to pay it back as you planned, life will happen.
Mounting debt strangles the ability to make the most of later life or in Jessica’s case – the ability to exist day to day - because one day everyone who creates a snowball has to stand in front of it.