Credit isn't real money

[jack]

Again, life questions from Drop the Dead Donkey. I maybe view credit differently to many people, being fortunate to normally have enough money, and being weaned on traditional views of fiscal responsibility, and think of a credit card as the least inefficient way of acquiring certain legal protections for quirks of historical reasons.

Using DTDD as an example. At one point Sally's purse goes missing with a large amount of money in. She suspects Dave, which he and everyone is extremely shocked by. At another, in revenge on Damien for something, George lets his daughter smash his car. Which is seen as harsh or vicious, but not unscrupulous or evil.

However, when Damien leaves and Dave spends a similar amount of money from his credit cards at Ladbrooks [gambling], everyone sees this more like the second than the first. I've seen it elsewhere too, that charging something to someone's credit card is seen as a bit cheeky (both whether or not you might expect them to mind buying it), when taking money from them to buy it is seen as wrong.

Why is that? (Is the implication that they might be able to recover the money with hassle? And it end up being stealing from a big bank, which isn't seen as so bad? But surely that involves reporting it as theft, which would get the friend arrested, wouldn't it?)

Comments

[cartesiandaemon.livejournal.com]

Yes, I mean the second. The first is interesting, but I don't exactly have anything to add, I wasn't thinking about that.

Those are all good reasons, when having credit is obviously the right financial choice (if sometimes unpalatable) and I think everyone agrees it makes sense for those situations. And it's interesting to see how many there are.

In fact, you miss one, when your earning power is growing rapidly. If your wage is steadily rising faster than an interest rate, then borrowing now might make sense. In an extreme case, imagine your salary was rising exponentially, faster than borrowing rates, then anything you borrow now is nearly free next year, so it's almost all upside if you want it at all.

But the point is, many people seem to find credit desirable in other situations, when a simplistic objective analysis might seem to suggest it wasn't, eg. buying a good car now, rather than buying the minimum necessary car and trading up later, or putting nice consumer items on their credit card.

It's possibly that's a "mistake" which is totally justifiable in the circumstances, but alternatively, maybe it's completely rational for some sixth reason for credit, that I hadn't seen

I have so much more to say about this, maybe I should write it up and post it. Although I am suddenly tempted to write it all here, with subheadings :)

Totally. Or both. Start here and then breakaway to your own post if you lke.

[d37373.livejournal.com]

Hmm, that's a little different from how I was thinking. Exponential earning potential is another way of saying "very low interest rates", which doesn't fundamentally change anything.

I was thinking about things from a financial point of view, rather than utility. From utility's POV, the other reason for debt is that the 'value' gained by owning the thing for an extra year is worth paying a n% premium for it. I would argue that there are very few things that are actually more valuable the earlier you get them.

[cartesiandaemon.livejournal.com]

I'm not sure if that's a misunderstanding? I don't mean, earning power generally, but if I'm getting steadily promoted (or expect to win the lottery tomorrow) then it makes sense to take big loans now if I want. In some sense that's like having a really low interest rate just for me, but I think it's a different case.

[d37373.livejournal.com]

You're still paying more for something you could have cheaper later. Let's say people A and B know they are going to get rich next year.

Person A borrows £100 to spend on gadgets at 10% interest, and pays it all off at the end of the year (cost of £110). Person B waits a year, then buys the same stuff for £100. B has better quality (less worn) stuff and more money.

One counterargument is that they're now so rich £10 is peanuts, and they can afford to spend it. I disagree - once you've got enough to live comfortably, £10 if £10 no matter how much you have in the bank.

[cartesiandaemon.livejournal.com]

Yes, you are still paying more, but that in that case there's an obvious reason for it, whereas in many uses there isn't. If tomorrow I'll have more money than I can spend, then it doesn't matter if I overpay on many things to get an extra day's use out of them.

Even if I don't literally have more money than I can spend the utility of that £10 tomorrow is likely to be lower than the benefit I get. You compare what benefit you get from that £10. You can have gadgets for a year. What else could I do with it? I could get 10% better gadgets or 1% better AV system or 0.1% better car or 0.005% better house... All barely noticeable, whereas having those gadgets now is quite good.

[d37373.livejournal.com]

You haven't got gadgets for an *extra* year, you've just got them a year *earlier*.

On the other hand, you are right about utility in the case where you are going to get rich. My intuition of utility is still a bit shaky - I have only recently started looking at the theory.

[cartesiandaemon.livejournal.com]

Well, assuming you've got gadgets for the rest of your life once you're rich, you've got them for "DEATH-NOW" in one case and "DEATH-NOW-1" in the other. Although we're basically agreed about this case, it's when people think it's wise and there *isn't* an objective reason we're puzzled about.

I don't have any technical knowledge of the subject at all, just thinking about it.