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The debate between the pro-leverage versus anti-debt crowd is heating up.
The Anti-Credit Trend
The Financial Post, NerdWallet and Reuters have been raising the alarm over millennials refusing to use credit and it's not just millennials either. Despite attempts by some scaremongers to raise fear about borrowing, there are entire anti-debt movements led by gurus like Dave Ramsey, which encompass members from all age groups.
Credit card experts, credit bureaus and the Financial Post appear concerned about the lack of applications for credit cards, and the drive to pay off existing debt like student loans. This may be a much larger reason for concern for markets that have thrived on debt and outsized interest based revenues for decades. According to a NerdWallet study those that are applying for credit are those with low credit scores (between 300 and 579), and they are obviously often being turned down. Yet, it is that disparity between those with better credit refusing to use credit and get into bad consumer debt which should speak for itself.
Is the Anti-Credit Trend Hurting Consumers?
Setting aside creditors' hunger for profit, could this movement be hurting consumers? Obviously if people don't go into bad debt then they aren't going to find themselves in such financial messes. Everyone still needs insurance and health coverage in order to offset major medical bills, emergencies, and health conditions that prevent them from working, but if they are cash strong, and have streams of passive income coming in from investments they should be just fine.
Still lenders are quick to pick up on the fact that credit has its uses. They use the fact that having established credit can be essential for buying houses, getting insurance, and even getting a job. In the US you reportedly can't even volunteer for the military and put your life on the frontline for what probably works out to be less than minimum wage, unless you've got good credit.
Time for Change
The system may not be fair. It is certainly weighted to encourage getting into lots of debt. The only way to change that is if savvy individuals stick to their principles and sound personal financial management, and force a change in credit ratings, and how credit scores are assigned.
What about Investing?
Where even the most diligent about not getting into debt struggle is when it comes to investing. Without question leverage is the most powerful tool available to investors. This is especially true when it comes to investing in real estate. In real estate leverage can facilitate oversized returns, while minimizing liability.
This has been one of the biggest traps for individual investors that rush into real estate with little preparation and load up on too much personally guaranteed debt. Yet, for savvy investors there are hybrid options. For those that despise debt there are equity partnerships that allow sophisticated investors to group together to make strong investments. In some cases this equity approach can also be coupled with modest non-recourse financing which gives investors all the upside potential of leverage without any of the risk of personal debt.
The anti-credit movement only seems to be growing. While lenders and credit card companies may not be happy, and nor are credit bureaus which make their money on charging creditors for data and reporting, being cash strong and free of bad personal debt appears smart.
If there is one place to use leverage it is for sound investments. Still, savvy investors will look to use equity leverage, or non-resource financing to enable them to stick to sound principles while maximizing the upside.