22 October 2008

Live Out Of Bad Credits

In Sydney, Australia and New Zealand Banking Group Ltd (ANZ) –being the third biggest lender – said on Monday that it expected much higher bad debt provisions in the first half of fiscal 2008. This reflects difficult conditions facing Australian firms amid the global credit crunch. The provisions will be about A$975 million or a 72 percent increase from a year ago.

In the midst of the credit crunch, the many bank rescue plans established in many countries around the world would re establish the confidence needed between commercial banks to ensure smooth functioning of markets on which business credit depends.

Do not be part of bad credits. There is an opportunity here. Here are my tips on how to ride your credit horse wisely.

Use Credit Card to Buy Shares

If you possess a credit card use it to buy shares. For instance if the offer price is S3.50 per share 1 lot or 1000 shares will cost $3,500. If you can borrow up to 70 per cent of the value of the shares it means you have to fork out only $1,050 cash upfront. With your credit card you can borrow up to 100 percent of the share value.

Assuming your bank charges around $400 (inclusive of processing fee) monthly instalment for 12 months, you will be on save track provided you pay on time to avoid interest of over 20 percent. And then you can hope that your share price goes up. I think it will. Be realistic. Can we afford to buy everything from cash? But there is some sense to this. If you are borrowing for ‘an asset’ in this case shares it is an investment. Let me give some encouragement.

The second-richest American and perhaps the world’s most revered investor, Mr Warren Buffet says he is buying US stocks for his personal account. To him a simple rule dictates his decision in investment –‘Be fearful when others are greedy and be greedy when others are fearful’.

Hold on to that property if you can

Gone are the days where a house is just a ‘giver’ of shelter. It is an investment in today’s context. In Singapore, if you own a house it is a guaranteed asset value appreciation. If you have bought a flat in 1987 and sold it in 1998 you could have made a whopping cash-in savings. If you are on a bank loan try to lock in for one year and then opt for refinancing to seek for better interest in another bank.

A property is an asset. If you dwell in it or rent it –either way it is considered an asset. If you rent it then you have to stay somewhere. The middle path to cash in a property investment is to stay in and rent part of the house- perhaps a room. This is what I called value integrated. Find other uses of your property where it can ‘earn’ for you

By holding onto your property you will gain in the long run. Moreover, you will not be in the list of the bank’s bad credits.

Turn Bad Credits To Good Credits

The scenario in United States is entirely and unusually different. There is this thing as sub prime mortgage or lending. Borrowers who apply for such loan have a heightened perceived risk of default, such as those who have a history of loan delinquency or default, and those with a recorded bankruptcy. So when borrowers failed to make debt repayment it caused a domino effect to the banking system. The failure of the investment firms, mortgage companies and government sponsored enterprises which had invested heavily in subprime mortgages so called triggered the crisis.

So what is the solution for the people of America? It is simple. Take responsibility on your bad credits. The Americans have to look at the bigger picture. I know it is hard but you have to somehow manage your debt if you have committed one. The crisis is something they have to learn from. Success is not all about money. It is about reaching on what you set forth. It is about completing all actions. You have decided on a course of action to allocate the country’s resources. You have to take responsibility for that. Turn bad credits to good credits.

‘America asks not what your country can do for you. Ask what you can do for your country’