The story of credit

A very nice story by Conrad:

Back in 1992, having Gold Cards from AMEX, MC and VISA was a big deal. This was because you REALLY had to qualify for it by having an obscene income that was validated by your income tax statement. The qualifying factor for Gold was an income above S$48.000 annually in a time when average pay was $2,500.

When you pulled out those cards to pay for something, it told people that you had arrived. It was a badge of wealth. You would get looks of envy, jealousy and respect. In those days, membership had its privileges and they were proud to sign for it.

In those days, the only person frowning at your card was the sales person who had to execute the transaction with a franking machine and a whole lot more extra work because they preferred the easier transaction; cash.

The gold card - everybody wanted it, few could have it.

Fast forward >>> 2010.

Today, those who don’t have credit cards carry cash. This is a time when having such liberties is a big deal. This is because you REALLY have it and can pay for anything and still have a handsome balance in your bank. The qualifying factor for Cash is to physically have it and have it in abundance.

When you pull out cash to pay for something today, it tells people that you have arrived. It is a sign of REAL wealth. You will get looks of surprise, envy, jealousy and respect. Today, membership is a liability and it gets embarrassing and stressful to have to sign for anything.

Today, the only person frowning at your cash is the sales person who has to count the change with a brain which is a serious challenge because they prefer the easier transaction; credit cards.

Cold hard cash - everybody wants it, few really have enough of it.

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20 years ago, loans were a heaven-sent for people who needed it for basic things like homes, business and education. Rates were affordable as loans were designed to help the ordinary middle class family to achieve progress in their lives.

Banks did not like dealing in loans as they were a liability and took a lot of work to qualify a borrower. They took risks to lend out this money but default rates were low relative to today’s rate of defaults. Not that many people became bankrupts as a result of bad debts as few could qualify for those loans and you could only get one loan at a time from any one bank.

Back then, it was shameful to let anyone know you had to take a loan.

Fast forward >>> 2010.

Today, loans are a necessary evil as people need it for extravagant things like clubbing, cars and condominiums. Rates are ridiculously high as loans are designed to help the banks achieve progress in their bottom lines.

Banks love dealing in loans as they are a great and steady income source and it is easy to qualify a borrower. They take small risks to bet against the borrower as default rates are higher relative to the rate of defaults 20 years ago. Many more people become bankrupts today as a result of bad debts as few actually qualify for these loans and are often over leveraged.

Today, it is commonly accepted and stylish for everyone to know that you are over-extended on your loans.

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In 1988, people saved like mad to buy a VCR, a Sony Walkman and the Motorola Tai-Kor-Tai.

Month on month, little by little, the savings grew and soon, that person was wearing a badge of wealth by flaunting those precious, hard-earned discretionary products.

Fast forward >>> 2010.

Today, people rush out to buy state-of-the-art Blue-Ray players and laptops, iPods and smart phones which costs more than half of their monthly income, if not all of it.

Month by month, bit by bit, the credit card debt grows and soon, that person is wearing a frown of stress from increasing interest payments by flaunting those extravagant and sometimes, unnecessary spoils.

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Back in the 80s, buying a car was really difficult. Car loans were hard to get. You needed 30% of the entire sale as a down payment and loans were to be repaid as quickly as possible. Finance companies would happily repossess your car if you failed to meet your payments.

Roads then were kept free of traffic jams with the use of deterrent systems such as car pooling, CBD charges and high road tax charges. Cars were also made less affordable with the introduction of COEs by car size. Only those who really needed a car and could afford maintaining one would buy one. And they could sell it quite easily for a good second-hand price to a ready market.

Fast forward >>> 2010.

Today, buying a car is really easy. Car loans are easy to get. You don’t need the 30% down payment anymore and loans can be stretched out over 10 years. Finance companies hate to repossess your car because they can’t sell it high enough to recoup their losses, if they are able to sell it at all.

Roads today are heavy with traffic as cars become more affordable and the ERP is a big money machine while barely keeping traffic volume in check. Anyone can own a car or two cars without being able to afford maintaining it. And these owners who can’t afford to top up their loans, won’t be able to sell off the liability when they can’t afford it. And the market is not interested in second-hand cars when new ones are so affordable.

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In the 70s and 80s, housing loans were for people who genuinely needed a place to stay and own. They could afford the down payment and had to qualify for the loan with a respectable annual income. Their income dictated the size of the home loan and thus, the size of the home they lived in. Government loan rates were made affordable so that everyone could own a home.


Fast forward >>> 2010.

Today, housing loans are for people who want to own more than they can afford. They only need to afford the down payment because they don’t need to pay up the rest of the loan by the time they flip the property for a quick gain. Their income is not an issue relative to the size and number of loans and thus, the size and number of the properties they flip. The government now qualifies buyers and shoves the over-qualified buyers to private banks to get their loans. (See second story.)

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In the 80s and 90s, trading and investing was only for the wealthy who could afford it and were part of an exclusive community. Anyone else wanting a piece of that action paid a hefty price for the privilege.

You needed to have cash to invest. There was no other way. No money, no talk - this was something straight out of the stock market then.

Fast forward >>> 2010.

Today, trading and investing is for anyone and everyone even if you can’t afford it and don’t have connections. The wealthy investors still get rich today as the poorer masses pay a hefty price for their ignorance.

You don’t need to have cash to invest today. Contra trading is the way. But like something else straight out of the market - when it is time to pay up, no money, no walk … RUN!

Read the whole article here.