Credit is defined as the provision of money, goods, or services with the expectation of future payment (MerriamWebster). The key word is future payment. A bank or someone acting as a lender gives you something that you don’t have, hoping that someday soon you will have it. Why would anyone give you something without ensuring it will be given back in return? Hopefully, when we are finished reading we will have this answer. A credit score is a number given to you by a credit agency. It is how they determine how worthy of a borrower you are. Key word being borrower. Why does a bank lend money so willingly?
A bank is a cash reserve. It is a placeholder for currency. The banks don’t own the money that is deposited into it. The primary revenue for banks, is interest earned off of loans. You deposit your money in the bank, the bank lends your money to someone else and charges an interest rate. The bank did nothing to get your money. It’s there because that’s where everyone stores their money. Banks pay a small interest rate (called an APY) to you on the money you deposit. But the interest rate the bank charges the lender, is often 5 times more then the rate given to the depositor. This is what makes banking such a profitable business. They make money, off of deposited money, earned by you and I. Banking is a important component to the capitalist system. In order for the economy to remain healthy. People must place there money in banks, banks must lend money to consumers and hope that the consumers will spend the money on goods and services. The banks have found every way imaginable, to get you to borrow money. By offering Car loans, Mortgages, College Loans and Business loans. There is a loan for every financial need you have. Interest rates on loans make the banks billions in revenue. What does this all mean?
Credit isn’t tangible. Your 750 FICO score is just a number. It essentially says you can borrow more money for cheaper than someone else. Why is borrowing money so encouraged in our economy? Why don’t we encourage saving the money we earn? This is because, If we don’t spend our money, the economy slows and people lose their jobs. This country and its capitalist economy works best when we are borrowing and spending money. Often, we don’t have the money to spend. The bank will gladly lend us money, and we will spend the money to buy goods and services from a business. That business will use the money earned to pay interest on its business loan it received from the bank. The interest made from the bank on the business loan, is then lended right back out to repeat the cycle again. The most important thing to note, the bank has recycled money twice and paid interest only once on what was deposited in their banks. This loan/borrow/spend cycle is keeping those who borrow in debt and continuing to make the banks billions of dollars.
In my opinion, the poor and lower middle class reliance on credit is what’s helping to keep us poor and lower middle class. We spend money we don’t have, from loans that we get, based off a number that those who lend us the money give us ( banks pay credit rating agencies). The wealthy use credit as a means to get rich. The poor use credit as a means to consume goods (there are exceptions to every rule). We consume ourselves directly into debt. The wealthy bet on our inability to pay this debt. Making money off our financial misfortunes. The banks write off our unpaid debt as a tax credit and sell our debt to third-party debt collectors making money twice off of one loan (bill collectors). Everyone is making money in this equation and the poor consumer is spending it. We are taught to buy, instead of create, because buying keeps the wealthy rich. The banks often make more money off you defaulting on your loans then they could if you paid them back. Why wouldn’t they continue to lend money? There plan is fool proof. They can never lose. For one, they lended you someone else’s money, if you pay, they earn interest, if you don’t, they write the debt off and sell it to a collector. The wealthy bet against you paying your debt and when you don’t they become even wealthier!
What’s the solution? I admit credit is useful. But using credit to our advantage is even more useful. Borrowing the least amount of money possible is always ideal. Creating leverage and collateral before you ask for a loan is important. Credit is just a tool used in the capitalist scheme to get us to keep spending money, we don’t have. A credit score is a way to assess risk and tag a interest rate to a certain amount of money lended, based on that risk. The greater the risk, the higher the interest rate. The lower the risk, the lower the interest rate. You shouldn’t be so eager to share that you can borrow money at a cheaper rate the someone else. Borrowing isn’t cool, it’s not a badge of honor. The idea is to not need to borrow. But to borrow only to minimize the risk of you losing your own money. For an example, study our current president. He once claimed a billion dollar loss on his taxes! Why would a rich man ask a bank for money? Because, why risk your money, when you can risk someone else’s? It’s the same principle for banking, just reversed. I’m not anti-capitalism. I believe in our economy, I just wish we weren’t so dependent on being consumers. Companies spend millions of dollars a year strategizing on how to get the poor consumer to spend their money (Smbceo). There is an attack on our poorest consumers and they use credit as a tool to do it. If you’ve built your credit, great for you. Just understand what credit is and what good credit means. Either way we look at it, credit is something the banks use and created. It’s never going to be a benefit for the consumer. The premise is to get you to borrow what you don’t have. Our entire economy is based off of us consuming goods. I hope this article will encourage you to do more research on credit and capitalism. You can be a consumer as long as you are a well educated one.