Last night my wife and I got to watch Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders. On the whole, the movie was enjoyable to watch and made some very good points.
The most enjoyable aspect of watching Maxed Out was seeing it in the context of the sub-prime lending fallout. The movie was made before the 1997 bubble burst on the hedge fund investors who were playing another game of Enron. But the writing was certainly on the wall, and this movie did a good job of documenting many of the problems with the modern credit industry.
At the end of the day, no economy will be able to sustain itself when a large portion of its wealth production depends on people who can’t pay back their debts. It’s a classic game of trying to generate something from nothing. And the reason the sub-prime credit crisis happened was that too much money was being loaned to people who would never be able to pay it back. It’s only when people can pay back the credit they take out that the creditors will make money.
Now, I agreed with the overall message of this movie: that credit should be handed out carefully to those who have the resources to manage it. The credit industry has not been policing itself enough. That’s pretty clear. But there were some aspects of the movie that I disagreed with. For example, one of the experts in the movie acted as if dropping from 2 cars per family to 1 car per family was a drop from middle class into poverty. My how times have changed!!! This theme reproduced itself several times throughout the movie. One woman who was on the verge of foreclosure lived in a McMansion and acted like the world was about to end because she was going to lose her $500,000 house.
In my view, it is true that Americans have probably been living beyond their means and need to start cutting back and downsizing a little. But that’s not the end of the world. It’s just the way the world works. We should only take out credit on things we are sure we have the resources to pay back.
At the Credit Card Pundit, we emphasize this time and again. Credit Cards should be productive tools to make your finances easier and more productive, not destructive tools that lead to financial ruin.
As a general principle, I recommend trying to live as if you only had 60% of the monthly cash-flow that you actually have. When you buy a house, try to buy a house that you could afford with only 60% of your current income. If you use this principle, then you will hopefully never find yourself “Maxed Out”