When Credit Goes Bad

If I told you a credit card company was increasing your credit limit to £10,000 from £5,000 you would probably think you were more credit worthy.

You probably are.

But what’s the difference between credit and debt? We automatically assume more money from a credit agency is good but that debt is bad.

Credit and debt are the same thing.

Difference Between Credit and Debt

Credit vs debtMy wife and I invited some friends over last weekend and over drinks the couple explained they were going on a round the world trip.

I knew they had money problems in the past 12 months so I was intrigued as to how they were affording it. It transpires that the credit card company were increasing their credit limit, which meant they had the money to go on their vacation.

They didn’t ask the credit card company for the money so they assumed the increase must be because they are good customers and safe. This made them feel that their existing debt wasn’t a problem. Even though their existing debt is over £15,000.

I explained, the bank and credit card companies lend to people who are in employment and don’t generally consider your full income and expenditure. They don’t know what your rent or mortgage is, what you spend on food or how expensive your gas or electricity is. Instead they make a judgement call based on other factors.

We shouldn’t be under any illusion that companies offering credit want us to “fill our boots”. The more money we take the more they can recoup in fees.

We did the calculation on what the cost of the credit would be after the trip and they realised the monthly repayment was HUGE!

Credit vs Debt

The debate over credit vs debt continues as the majority of society view credit as positive and debt as negative. When, if truth, they are the same.

Credit, managed correctly, is a good thing. Many of us need credit for our mortgage, for buying a car or upgrading our house, however, it’s got to be affordable and managed correctly. I always think about the repayment costs and length of time I’ll be repaying the debt.

Credit, poorly managed, turns into a debt problem.

Contingency Planning

I’ve learned that if you “fail to plan, then you should plan to fail”, especially when it comes to credit.

A £10,000 credit line is only manageable as long as you can repay the debt! Most people never think about what will happen if they lose their job, get divorced or have extra children. A credit agreement which was affordable can quickly become unaffordable.

Make a contingency plan now, before it’s too late. Millions of people will struggle if their income changed, and could only survive for 1 month before they dipped into their credit cards.

A contingency plan won’t stop financial problems from occurring  but it will mean that when things happen there is a plan to support you and your family in the short term.

I can say this as somebody who has made this mistake before and learned my lesson.

Now, my family and I save our spare money instead of having to spend every penny. I set myself targets of how much we can save monthly and at the end of the year I’m aiming to meet a goal.

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John The Bankruptcy Guy

As an ex-bankrupt, John has experienced the highs and lows of credit. It's with this knowledge that he writes Debt Advice Resource - to help others avoid, or navigate out of, the pitfalls of debt.

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