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10 Reasons Credit, Debt and You Should Be BFF

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Consumerist linked to a post on Zen Habits about how to live a life without credit or debt and my first reaction was “why?” There are plenty of reasons why credit cards and leveraging debt are beneficial, just as many reasons why they are dangerous, and understanding those are just as valuable as understanding why you should be wary of them. I’m a huge fan of credit cards and using debt to your advantage and here are ten reasons why.

Credit

1. Credit cards give you cashback

According to the Bureau of Labor and Statistics, the average household expenditure is approximately $46,409 a year in 2005. At 1% cash back, that’s an additional $464 in your pocket just for using a credit card instead of paying with cash. While five hundred dollars doesn’t seem like much, but I bet you’d rather have a free $500 than not have a free $500 right?

2. Credit cards protect you against fraud

You might think that credit cards introduce you to more fraud but I’d argue that it also protects you against fraud and in other ways as well. Let’s say you buy something online and it is delivered in a condition other than what the company originally portrayed it as. You buy new and it comes refurbished, you buy a higher end model but get the lower end model, or you bought red and they sent you black… but the vendor isn’t willing to talk to you anymore or has disappeared into the ether? Call your credit card company and let them deal with it.

3. Credit cards are safer than cash!

Would you rather be carrying $5,000 in cash around with you in your pocket or a small piece of plastic that gives you access to $5,000? If you said the cash, you’re just asking for trouble! Being able to access a large sum of money without actually carrying it very important, that’s why banks exist, and so why would you put yourself in the position of danger just to avoid using credit?

4. Credit cards are valuable in emergencies

This is aligned with reason 3 in that you can access funds you don’t actually have on you. Let’s say you are stuck in a foreign country and you need to buy an airline ticket back to the United States. Do you have enough cash on you? If you do, great; if not, well you’re out of luck unless someone wires you money… or if you have a little piece of plastic.

5. Credit cards provide protections, warranties, etc.

Okay, this is the last one about credit cards… credit cards will actually give you protections and warranties just for using them. If you use a credit card to make travel arrangements, many of them offer travel insurance; if you use a credit card to make a product purchase, many of them offer to double the manufacturer’s warranty up to a year; if you use a credit card to rent a car, many of the offer liability insurance. These are tangible benefits with actual cash value that can save you money in the long term. Cash offers none of these benefits.

Debt

6. Try to buy a house without a mortgage

Homeownership, for the last bazillion years, has been the number one best way for the average joe citizen to acquire wealth and that would be extremely difficult to do if one were not able to take on debt. The argument of whether you should buy or rent is one that’s been discussed into the ground, so I’ll ignore it now, but if you want to buy a house, doing so without borrowing money will, at the very least, limit your housing choices and, at the worst, prevent you from doing so.

7. Try to attend a private college without loans

When I went to school, I took out a lot of government backed Stafford loans to help pay for the schooling and I probably would’ve had a very difficult time attending without them. Certainly I could’ve attended a public college or university and been fine, but unless you have quite a large sum of money saved up, going to a private college or university is almost impossible without a loan of some kind. Add to the fact that if you graduate from college, public or private, your earning potential is significantly higher than if you hadn’t graduated – thus making the case that taking on this debt is a positive investment, much like a home.

8. Business is all about leveraging debt

Ultimately, I believe you have to treat yourself like a business. You go to school to improve your skill set so that you can market your services to another business in the hopes that they will hire you. Much like a business, you should use debt as a tool to achieve your goals and to discard debt out of hand is clearly a mistake. If the investment makes sense, such as in a strong college that you can take advantage of, don’t let the word “debt” or “loan,” scare you off from pursuing what you need to succeed.

9. Using debt wisely improves your credit score

If you shun all credit and all debt, you’ll likely not have much of a credit history to work with and thus a relatively low (and probably very inaccurate) score. Your credit score percolates to many many aspects of your life, including how much you pay for rent (or if you are even able to rent), how much you pay for various insurances, and how you appear to your employers as an applicant. By using debt wisely, you improve your score and thus lower some of the other necessary expenses in your life that don’t appear to be related to credit or debt.

10. Certain debts are tax deductible

This is by far the weakest reason for taking on debt, that it is tax deductible, because you could argue that it’s better to not pay interest in the first place. Now, I would agree except with one minor exception and that’s a product more of our IRS tax code than it is anything else. There are certain financial instruments, such as Roth IRAs, where your participation is limited by the amount of income you earn in a year. By borrowing money for a home or for education, you can reduce your earned income by the amount of the interest payments and thus make yourself eligible for some benefits otherwise unavailable to you.

There you have it, a layman’s response to a zen master’s thoughts, what do you think?

{ 17 comments, please add your thoughts now! }

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17 Responses to “10 Reasons Credit, Debt and You Should Be BFF”

  1. Jim says:

    Excellent post.

  2. Josh says:

    Those are pretty much my own reasons. Why not use a credit card to pay car insurance or your phone bill and get some points? You have to pay it anyway!!!

  3. It all boils down to discipline. I myself pay in full every month. So I get the full benefit from the cash rebates I earn with the blue cash card. But I know many people who have trouble paying in full every month. They say if they use a credit card, they are tempted to carry a balance occasionally.

    This is a great post.

  4. Steve Herman says:

    All great points, but there is another reason why credit cards are so great…you get a 30 day float when you use it. This is very powerful if used the right way!!

    Steve Herman

  5. Henrik Soke says:

    Great article. This is something that should be taught in schools. Seriously.

  6. 1. True, but only if you don’t have an annual fee, any late fees, no interest fees, over-the-limit fees, etc. Businesses are in the business of making money, not giving it away. For that 1%, there are MANY ways they can get their pound of flesh back.

    2. & 3. Agree.

    4. Agree, but there are times when having a few hundred dollars trumps having credit cards. Being on a back highway out of gas and the only gas station takes cash only comes to mind. Some cash is always good to have around.

    5. Having rented a car recently, the CC does provide insurance, but the car companies are pushing ‘additional’ insurance to cover what the CC insurance doesn’t. I’m not quite clear on what that is, but seemingly there is some gap.

    6. Agree.

    7. Somewhat agree. Private colleges don’t necessarily educate better, they have the ‘prestige’ pedigree that you’re paying for. You can learn just as much at a state college as an Ivy League if you try, but the gee-whiz factor is much lower for people looking at your degree. (Ever talk to anyone that was proud of their Univ of Phoenix on-line degree??)

    8. Agree to disagree, Business is about leveraging Assets. Debt if used correctly can be an asset. If not, it can bring down businesses. If you look for an example, the Subprime meltdown is good.

    9. Agree, but your credit score is only good for getting more credit (for the most part). It’s a Catch-22. You need credit to get a credit score to get credit to get a credit score, etc. Many people have sworn off credit entirely and done just fine (Dave Ramsey brags about his ZERO Fico score).

    10. WILDLY disagree. If I pay someone $10,000 interest to get a $3000 tax abatement, that’s just backwards. I’d just rather pay the $5000 taxes and take home the rest. If you’re that close on the fringe between being able to get Roth and not, make a charitable contribution instead of paying interest.

    Sorry for the long post, but this EXCELLENT article deserved a more in-dept response.

  7. I think you’ve got it pretty much down. I take on certain types of debt, including student loan and mortgage debt. I use credit cards, but without the debt part, and I take advantage of tax breaks when I can get them! Thanks for a great article.

  8. Posco says:

    Right on. I especially liked two of your thoughts: First, proper use of credit and debt requires discipline. If you have no self-discipline, then, yeah, go for credit-and-debt-free route mentioned in Zen Habits. For the rest of us, we can learn to exercise a little discipline and reap some nice rewards.

    The second thought I liked is #8. Some debts, mainly student loan and mortgage, are investments for the future. Not only are you investing in yourself, even the Government is investing in you by subsidizing your loan’s interest. As usual, a little discipline and foresight must be thrown in… you shouldn’t max out all your financial aid loan offers just because they’re offered to you. And you should examine the terms of a mortage or be careful about taking out on your home’s equity to ensure that you can bear the payments for the life of the debt.

  9. Dean in Des Moines says:

    Zoologist linked to a post on Animal Habbits about how to live without rattle snakes and my first reaction was “why”? There are plenty of reasons why rattle snakes are beneficial, just as many reasons why they are dangerous, and understanding those are just as valuable as understanding why you should be wary of them. I’m a huge fan of credit cards and using debt to your advantage and here are ten reasons why.

    Credit

    1. Pets make you healthier
    According to the American Medical Association, the average household with pets is approximately 80% healthier. Further, people with pets live longer and happier. You do want to live long and be happy, don’t you?

    2. Rattle snakes protect you against robbery
    You might think that rattle snakes introduce you to more harm but I’d argue that they also protect you against robbery and in other ways as well. Let’s say you buy something online and it is delivered in a condition other than what the company originally portrayed it as. You buy new and it comes refurbished, you buy a higher end model but get the lower end model, or you bought red and they sent you black… but the vendor isn’t willing to talk to you anymore or has disappeared into the ether? Have your rattle snake settle the issue while the vendor sleeps.

    3. Rattle snakes are safer than fluffy bunnies!
    Would you rather be carrying 5,000 fluffy bunnies around with you in your pocket or a small snake that gives you access to thousands of dollars worth of threats and protection? If you said the fluffy bunnies, you’re just asking for trouble! Being able to threaten ne’er-do-wells without actually carrying a gun very important, that’s why pet shops exist, and so why would you put yourself in the position of danger just to avoid using rattle snakes?

    4. Rattle snakes are valuable in emergencies
    This is aligned with reason 3 in that you can access fear in your attackers you don’t actually have. Let’s say you are stuck in a foreign country and you need to buy an airline ticket back to the United States. Do you have enough cash on you? If you do, great; if not, well you’re out of luck unless someone wires you money… or if you have a little snake to threaten the airline with.

    5. Rattle snakes provide protections, warranties, etc.
    Okay, this is the last one about rattle snakes… rattle snakes will actually give you protections and warranties just for using them. If you use a rattle snake to make anti-venom, many hospitals will offer payment or kickbacks; if you use a rattle snakes to make anti-venom, many hospitals offer to keep some on hand just in case you need it later; if you use a rattle snake to barter for a loaned car, many friends offer the car use for free. These are tangible benefits with actual cash value that can save you money in the long term. Fluffy bunnies offers none of these benefits.

  10. Matt in Greenville says:

    are you out of your mind? debt beneficial? only if you are the creditor. The single largest wealth building tool you have is your income. Wow. Borrow your way to financial security is like drinking to sober up for the drive home. Does not compute.

    good luck to those who try this route.

  11. kitty says:

    ” True, but only if you don’t have an annual fee, any late fees, no interest fees, over-the-limit fees, etc.”
    Plenty of cards have no annual fee. Don’t pay late and you’ll have no fees. Don’t carry balance and you’ll pay no interest. Sign up for automatic payment of your full balance and you’ll never be late or pay interest. Pretty simple, really. By the way, in German passport control they asked me to show a credit card. No card – no entry (ok, I haven’t tested this one).

    Good post. I personally think that state colleges are fine for some areas of study: e.g. Computer Science at the University of Illinois at Urbana-Champaign is up there with the best private universities. As long as you know which university is strong in which field. Although if you are not lucky enough to live in the right state, it’ll be pretty expensive too, but still cheaper then some private universities. Also, for engineering one can go to a state university as an undergrad, than go to a private university for graduate school on an assistantship. Doesn’t work for all fields, but in some cases doing a little research and finding a state university that is really good in a specific field may save money.

  12. Chris in Memphis says:

    Most of these tips may be good for 5% of the population that will actually do them. The other 95% of people will not. Cash is king. Just ask the folks who are TRYING to sell their homes because they were ‘over-leveraged’. I only owe on my house and that will be paid off early. The next house I buy will be done with CASH because I wasn’t a slave to the bank and credit card companies.

  13. Your arguments #1-4 can all be covered with my debit card. Yes, I get a 1% “reward” for using a debit VISA card :) #5 I suspect is actually costing you more than it protects you.
    I will concede the mortgage point, especially in certain regions, and a partial concession on the student loans at the graduate level…I’ll have to see how I make out next year on scholarships and financial aid when I head off to graduate school myself. I am of course trying to do college with absolutely NO student loans. As for business…I believe it is better to start and run a business without debt. Somewhere I have heard that most small business failures are attributed to debt load killing off profitability, but I can’t remember where I have seen that.
    As for having a credit score and tax deductions…I just cannot see the logic in either of those.

  14. Rich says:

    Boy, some of these comments from “professional” bloggers really show why they are in trouble with debt in the first place. Quoting Dave Ramsey who says pay off the lowest balance card, interest rate be darned? WRONG. Don’t take on debt in your business? These are businesses larger than your lemonade stand folks. It’s hard to capitalize a new business with your savings account in most cases. WRONG. Paying extra for extra insurance to cover a gap in coverage? WRONG. The car rental companies LOVE that you’re so misinformed. Debt is not beneficial in some cases? What about all the wealthy people who buy planes and second and third homes for the tax write-offs? Do you think they do it to LOSE money? WRONG AGAIN.

    All these and more are the reasons that so many people are poor and will stay poor in this country. Ignorance and pretending to be an expert when you can’t even use a caluculator or common sense to arrive at the correct financial conclusion. Sheesh.

  15. Rich says:

    Regarding the debit card comment above. Boy, you really need to do some research on the dangers of debit cards. After you hear some of the horror stories you’ll never use one again. You are probably not covered against fraud. And #5 costs nothing, if you’re responsible and pay off your debt every month on time. It’s really not that hard. I’ve been doing it manually for 9 years and have never been late.

  16. Erik says:

    Theses are all traps that credit card companies want you to fall into in order to become addicted to using their credit card. Eventually, they know that the statistics show that you’ll be irresponsible with the credit card and THEY will start making money off of you.

    Do you know any millionaires? Ask them if they became a millionaire by playing games with credti cards. email me if you know a couple.

  17. jim says:

    I know some millionaires and no they didn’t become millionaires by playing games with credit cards but they did evaluate a situation and see how they could take advantage of it. Granted, one could say that we’re taking advantage of the credit card situation but that’s clearly too small of a scale (at least on this side) to make anyone millionaires but the personal characteristics are the same.

    I don’t dispute that there are traps and everyone should be careful.


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