Is Too Much Credit? The Disconnect Between Credit and Common Sense!

I do a lot of reading on different subjects, but recently the topics in our business revolve around credit.  Credit used to mean that you could have the peace of mind that if you did not have enough cash on you, you could charge it on your charge card!  Think of it this way it was like a AAA card or an emergency cash fund! 

I grew up in New York City at a time where in the 50, 60's and early 70's when credit cards were not a major part of society.  It was not uncommon to go into a store and see a sign that said "No Personal Checks!"  If a person wanted to buy a big ticket item like a new TV, a refrigerator or furniture you would buy it on time!  That meant you would pay off the purchase of an item and when it was paid off you picked it up!  There was no interest charged for the purchase.  For the holidays we had Christmas Club Accounts - all year long you'd put in a few dollars and redeem your account just before the holidays.  The sentiment was, if you do not have the money you do not buy it.  When it came to buying a home it was no different.  The 70's required for the most part 25-30% down payment.  Everyone worked as many hours as God could give you to save up the money for the down payment.  No one would ever really think of asking the seller to pay closing costs. When it came to homes, and autos for the most part folks just purchased what they could afford.  In those days in real estate we qualified the home buyers first before showing any homes.  No one would ever get in the car or inside a home until it was determined they had the money to purchase, and the funds to pay for their closing costs!  There were no inspections other than your uncle or father coming over to take a look at the home - usually prior to making an offer!  All parties were appreciative and respectful.

More recently it seems like every single rule about buying anything got lost in credit stupidity!  Think through some scenarios...If I go into a grocery store to buy a quart of milk with the $5 in my pocket - back then... I emerged from the store with only the quart of milk and my change.  With credit I go into the store with no money in my pocket and a credit card in my wallet and emerge with a quart of milk, sushi, gourmet olives, chutney, 2 rib eye steaks, some asparagus...and $80 dollars on my charge card!  Something changed.  Common sense seems to have stayed outside the store when I went into buy just that quart of milk!  So is this what happened to home purchases?  Did folks buy more home then they needed?  Did greed replace need?  Why did home buyers not sacrifice, or save up any down payment or closing costs?  FICO scores and Credit scores do not mean you have a high IQ!  It just means you have a credit history!  I'm sure there are loads of folks that had good and great credit scores being foreclosed right now!  To prevent this from happening...parents years ago would tell you some basic common sense rules:

• If you cannot afford to pay cash for it, don't buy it! 
• Barring normal debt -don't let mortgage exceed 2.5 Times Your Gross Annual Combined Income!
• At least 20% cash down payment - avoid the Private Mortgage Insurance (PMI)
• Do not avoid PMI by Financing a 2nd!
• The more money down the lower the monthly payment!
• Never pay full price!  Negotiate!
• What are the total carrying costs?  Utilities, Gas, Electric, Water, Taxes?
• Do not buy what you cannot afford to pay for it with out overtime!
• Do you have 6 months cash reserves?
• If your spouse were sick could you carry the home and payments?
• When you get into a home, start prepaying the mortgage! 
• Have a goal in life is to have a Free and Clear Mortgage!
• Credit is good but cash is better!

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