The Credit Trap and How to Escape It
By Suzanne Manziek

Back two years ago and beyond that, the banks were lending money to individuals whether they could pay it back or not. I think greed took over and the banks began to not care about whether the borrower could pay it back or not, if they defaulted then the bank could just charge more interest and compound interest on interest and make even more money. I know of cases where individuals would go into the bank to borrow lets say $100,000 and the bank would talk them into $150,000 a more expensive house, car or equity line. The borrowers know what they can comfortably pay back but when a lending institution is telling you, you can afford more I think people just wanted to believe them.

I think for the most part the American public confuses the definition of an asset verses a liability. They do not consider the fact that liabilities; credit cards, mortgage loans, car loans, furniture loans, home equity loans etc. all cut into their ability to build assets. Assets are things that make you money not things that cost you money. Assets are what you need in order to become wealthy. Liabilities are the things that can ultimately make you poor. It is a very common misnomer that people living in large houses and driving expensive cars are rich. Things like this do not necessarily define wealth. Wealth is only present when the assets on a financial statement out way the liabilities. To make it simpler if you buy a house and have to mortgage it, that mortgage is a liability therefore the house cannot be defined as an asset. It is only an asset if it does not have a mortgage.

The key to wealth is eliminating your liabilities and building your assets. Of course it is difficult to build assets if all of your income is being eaten away by living expenses and then liabilities. The first step would be to eliminate the liabilities as quickly as possible. Do not take on any additional liabilities during this process. Remember that a liability is anything that does not make you money but costs you money. Once you have eliminated the liabilities then you should start looking to acquire more assets.

The best advice I think I have ever received is not to get caught up in the credit trap. Once you get in it is very hard to get out but it can be done with discipline. If you have to buy something with a credit card you probably cannot afford to have that item. Again this is where self discipline comes in. Try to stop and ask yourself if you really need it before you buy it. Think about whether or not it is an asset or a liability. If it is a liability you probably can live without it. Little purchases do add up to eventually large amounts of money. Avoid the credit trap. You will be glad you did and you will have a much better chance at building assets.