First of all, it’s never too early to understand the implications of using credit in business transactions as this is how most transactions are conducted in our economy today. It’s also just as important to teach our children how to properly use credit since it’s like a double-edged sword. Credit can help you on one side, but it can also hurt you badly on the other.
When I was younger, I learned a personal lesson on credit that I will never forget. If you are over the age of fifty, you’ll recognize this story as it was occurring in many inner city neighborhoods years ago and I have a feeling it’s still happening today.
If you know anything about my story, my family didn’t have a lot of money when I was growing up and we subsequently struggled financially just like every other family in our community. When we needed groceries, we would go down to the corner store to buy them. A lot of times my family didn’t have the money, so Mr. Peterson (that’s not his real name) would kindly extend credit to my mother. When she would get money at a later date, my mother would go see Mr. Peterson to pay off the debt.
This process went on for as long as I could remember, and not just for my family, but for most of the families in the neighborhood. Mr. Peterson was so highly revered in the neighborhood that we would always take our business to him instead of going to another store. In other words, Mr. Peterson had it made. Unfortunately, because we didn’t really understand how credit worked, we didn’t realize the downside of this arrangement.
One day when I was older, my mother was ill so she told me to go down and pay our bill to Mr. Peterson. After arriving at his store, Mr. Peterson took me into the back and looked at this book that had our name on it. He opened the book and told me what we owed him. I was immediately thrown off guard by the huge bill because I couldn’t recall buying that much stuff so I asked him to explain.
Mr. Peterson said that my mother had a revolving line of credit at his store and that he would charge the account a monthly fee if it wasn’t paid in full. Since our account was never paid in full, that was why our balance had escalated so high. When I asked what interest rate he was using to calculate his fee, he stated that it was around 30% (which meant it was higher).
By that time, I had grown up and learned a little about how interest rates worked and the impact they can have on you. So, I told Mr. Peterson that there was no way we could ever pay off that amount if he used such a high-interest rate. He countered that my mother knew about this credit arrangement, and it wasn’t a big deal. I told him that my mother wasn’t knowledgeable enough about credit to understand the impact of being charged 30%. Despite my best efforts, Mr. Peterson said that he would continue to charge our account interest until we paid the balance in full since that was the original arrangement he made with my mother.
Mr. Peterson turned out to NOT be the nice person we all thought he was. I also learned that he had made this business arrangement with many families in the neighborhood and it was very profitable for him.
Instead of going back to complain to my mother, as she was doing her best to keep food on our table, I went to my manager at the store I was working at part-time and explained my situation. Since I had such a good track record with him, my manager lent me the funds to pay off Mr. Peterson and stated that he would deduct a certain amount from my wages until I paid him back. In that situation, my manager was what you can call a friend since he helped me get out of that difficult situation.
As we push the clock forward to today, there are multiple “get cash now” firms like Payday Loans, Advance America, and Lending Tree, which are just like Mr. Peterson. These companies act like they are your friend, but based on their payback policy, they are your worst enemy.
In closing, I hope that reading this article helps you understand that when you buy on “credit”, you can’t forget to read the fine print on the repayment terms. You should do so because this is often a good deal for them, but not for you. The “Mr. Petersons” are in establishments everywhere and they have made enough money on us. So, always know your interest rate on all credit transactions and be careful before signing your name on these “friendly contracts” that appear one way, but, in reality, are quite different.
I would love to hear your thoughts on this article. Please leave a comment below.