Devil's advocate: Credit is good for you
The use of credit doesn't deserve the bad rap it's gotten in recent years.
One of the big lessons from the post-credit crisis era -- and you could argue we're still fighting through the crisis itself -- is the idea that cheap credit and cheap debt are bad for you.
In general, I'd agree that racking up double-digit interest rate debt is a very bad thing, but having access to that credit can be a very good thing.
It's been a while since I wrote a Devil's Advocate post but I think it's timely. There's been a huge backlash against credit and debt lately, in part because they were a cornerstone of the credit crisis. I think the anger and fear are a bit unfounded. For every irresponsible borrower, there's a responsible one taking full advantage of credit and using it in a way that enriches his or her life.
Today, we'll look at just a few of the reasons why you shouldn't abandon credit.
Builds credit score
We live in a society where your FICO credit score is important to everyday life. Whether you're looking to rent an apartment, buy a car, or just borrow money, having a good credit score is important, and the only way you can get a good score is by demonstrating good credit practices.
Unfortunately, you can't demonstrate you're responsible with a loan without getting a loan in the first place. It's one of the cruel catch-22s today and one of the main reasons why I think debt can be a good thing. You don't need to carry a balance on your credit card to prove responsible credit use. You don't get bonus points for carrying a balance or paying interest. You simply need a card that you use regularly and pay off regularly. By using credit responsibly, you prove you can be trusted -- and you can get more favorable rates.
Credit adds flexibility
A while back I asked everyone to share their total unsecured credit limit and I was pleased to find out that many people had relatively high limits. In the year and a half since, I'm sure that number has been pared back a little as credit card companies look to reduce risk. But I suspect many folks still have access to a large line of unsecured credit.
Having that kind of access is important because it offers flexibility and options. I have no need for a line of credit of several tens of thousands of dollars right now, but you never know when access to that amount of credit could be valuable to me. Let's say there's some sort of emergency where I need access to that amount of cash. If I carried only a debit card, I'd be out of luck because I don't have that kind of cash in my account.
Credit is more efficient
While paying for something with cash may be satisfying from a psychological perspective, it's inefficient. With credit card rewards, you could be earning points or cash back on your purchase. There are plenty of 0% balance-transfer credit cards that can give you a 12-month loan for free, which you can pay off with the cash you would've spent. Using credit to buy something makes your buying fractionally more efficient than using cash, and you'll need to decide for yourself whether that's worth it.
Credit and debt are tools -- very valuable tools -- but, like anything else, they can be abused. We learned this during the credit crisis when lenders let buyers purchase more house than they could afford.
We don't teach people how to properly use a hammer, and credit is just as dangerous, but they each have their purpose and are great at their jobs.
More from Bargaineering and MSN Money:
(I also have to really question the idea that the ratio of responsible to irresponsible credit users is 1:1. I think if that were true, a lot of people -- and indeed, the country -- would not be in the situation they're in now.)
FICO score? That's like the chicken and the egg...is it the reason to have credit, or is credit the reason for it? Now I have been hearing (elsewhere on this blog, for that matter) that paying one's rent on time can count toward it.
Credit is not cash. That is a cash advance. Taking out tens of thousands this way in an emergency may be better than a payday loan, but not by much. If you don't have the money in your account now, how do you know you will when it comes time to pay the bill and the usually astronomical APR? This is a good reason to have a liquid emergency savings account, not a credit card as a first resort.
Rewards programs? Meh...yeah, it's nice, if you don't think about the fees they are charging retailers to be able to do it. Somebody has to absorb that.
I have my reasons. I feel it's harder to get cleaned out than if you carry wads of cash. Stolen credit cards can be reported with limited liability for fraudulent purchases. Also, I tend to look at cash on hand as how much I am allowed to spend -- and if I'm allowed, why not spend it all? It's hard for me not to look at it this way. I may spend a bit more on credit at the beginning of a billing period, but beyond that I am much more judicious knowing the bill is coming.
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