In book two Adam Smith discusses the nature, accumulation and employment of stock. He states, ‘His revenue is, in this case, derived from his labour only. This is the state of the greater part of the labouring poor in all countries.’ In other words, a man could only spend what he earned.
DEFINING IDEA…
Nowadays people can be divided into three classes - the haves, the have-nots and the have-not-paid-for-what-they-haves.
~ EARL WILSON, POLITICIAN
That statement was before the invention of the credit card, however. John Biggins, an innovative banker at the Flatbush National Bank, New York, is responsible for our flexible friend. In 1947 he initiated a local community credit plan called ‘Charg-It’ that involved businesses located in two-square-blocks surrounding the bank.
The success of Biggins’ idea attracted interest from other quarters. Two years later, Diners Club successfully launched their credit card. Within a year of inception Diners Club had managed to sign up 285 establishments and 35,000 cardholders, each paying $3 per annum for the privilege.
Today, the credit card business is enormous. In less than seventy years there has been an explosion in cards, allowing consumers easy access to money they have not earned. The consequences are nothing short of disastrous. According to Credit Action figures for December 2008, 27.4 million plastic card transactions will be made today with a total value of £1.56 billion. The total credit card debt in the UK for October 2008 was £53.1 billion, while the UK collective credit limit is £158 billion! The average interest rate on credit card lending is a whopping 17.9%, which at the time of writing was a staggering 14.9% above the Bank of England base rate.
According to uSwitch 7.3 million customers withdraw $3.7 billion in cash each year from their credit cards with an average interest rate of 29.97%. This money is used by an estimated one million to pay mortgage, loan repayments and household bills. Over 200 years ago, Smith warned of these ‘spendthrift’ practices when he advised not to, ‘contract a second debt in order to pay the interest of the first’.
The British Bankers’ Association (BBA) reported the number of credit card balances bearing interest in September 2008 was a massive 73.2%. This means that almost three-quarters of all credit card users don’t pay off the balance each month - which is the only sensible way to use them. Even those involved in the business know how financially ruinous credit debt can be. In 2003, Barclays’ then chief executive Matt Barrett gave evidence at the UK Commons’ Treasury select committee investigating credit card charges. He revealed, ‘I do not borrow on credit cards. It is too expensive. I have four young children; I give them advice not to pile up debts on their credit cards.’
It’s still wise to spend only what’s derived from our labour.
HERE’S AN IDEA FOR YOU…
Do not buy what you can’t afford, do not buy what you can’t afford, do not buy what you can’t afford… Ask yourself, ‘If I had to hand over cash for the item I’m about to purchase, would I still want it or be able to do so?’ If the answer’s ‘No’, don’t buy it! I repeat, do not buy what you can’t afford, do not buy what you can’t afford…