Avoiding the 'buy now, pay later' trap

Credit cards can be a great thing when used responsibly. They encourage consumption, which in turn boosts the economy. And they're convenient.

The downside is that credit can create the illusion of wealth for people of ordinary means, while imposing a harsh reality of debt. Credit sings a siren song, and then, as in the Greek legend, runs your ship onto the rocks.

I learned this the hard way over the years.

With a fistful of plastic, excess consumption was the norm. I used cards for instant gratification.

"Buy now, pay later" became a way of life. "Wants" had a way of becoming "needs": I needed a sleek cellphone, a better car or a more comfortable sofa to go with a new TV, even though the old ones served well enough.

My debt consisted mostly of nonessential luxury goods that, with more self-discipline, I could have postponed, saving money to pay later in cash.

At one point, 25 percent of my disposable income was needed to service my consumer debt - before paying the rent and utility bills and buying food. I was perpetually broke, though I had a lot of "stuff".

Thankfully, those days are gone. The global financial crisis provided a wake-up call, and I determined to go retro - back to cash.

It was a liberating moment when I took scissors and turned all my cards into confetti.

One of the appealing things about China is its widespread cash-on-the-barrelhead business model. If you want it now, you pay for it now. China also has the highest rate of household savings in the world. That is admirable and wise.

But the use of credit cards has exploded in recent years, especially among young adults already saddled with student loans, who sometimes spend beyond their means.

The problem is not in the credit cards themselves. It's the out-of-scale appetite for "stuff", fueled by a desire to keep up with other people.

Overdrawing is emerging as the latest social malady in China, according to news reports.

Banks now want to share their customer data to reduce financial risk - separating the responsible consumers, who pay their bills on time, from the irresponsible ones, who don't.

I don't blame them. The risks can be significant. In the US before the downturn, for example, average total household debt (including mortgages) was 130 percent of gross monthly income. Families were dangerously leveraged.

Then came the bankruptcies, the hunkering down and the belt tightening. Debt fell to a more healthy 80 percent.

Now it's ticking upward again as optimism grows. And that's good for the economy, provided it doesn't lead back to insanity.

But I'll be sticking with cash. I've found that immunity from creditors is a great stress reliever.

It's a lesson my parents tried to teach me long ago. Their lives were shaped by the Great Depression of the 1930s, when material possessions were scarce and frugality meant survival.

Today, they still live by a simple code:

"Use it up. Wear it out. Make it do. Do without".

Contact the writer at randy@chinadaily.net.cn