Devil's Advocate 

Credit & Debt Are Good For You (In Moderation)

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This is a Devil's Advocate post.

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 felt that it was time. There’s been a huge backlash against credit and debt lately, in part because they were a cornerstone of the credit crisis, and I think that anger and fear is 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 their life. Today, we’ll look at just a few of the reasons why you shouldn’t abandon credit.

Builds Credit

We live in a society where your FICO credit score is important to every day 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-22’s 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 simply need a card that you use regularly and pay off regularly. You don’t get bonus points for carrying a balance or paying interest. By using credit responsibly, you prove you can be trusted and you can get more favorable rates.

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 think many folks still have access to a large line of unsecured credit.

The value of 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 needed access to that amount of cash. If I only carried a debit card, I know I’d be out of luck because I don’t have that kind of cash!

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 off 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 it can be abused. We learned this during the credit crisis when lenders let buyers purchase more house than they could afford (plenty of people defaulted on loans without ever making a single mortgage payment!). We don’t teach people how to properly use a hammer and credit is just as dangerous, but they both have their purposes and are great at their jobs.

{ 21 comments, please add your thoughts now! }

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21 Responses to “Credit & Debt Are Good For You (In Moderation)”

  1. Bogey says:

    Sometimes I feel like I want to pursue true debt freedom (even having my mortgage paid off). But my side hobby/side job/obsession is investing in real estate. Investing in real estate takes so much capital as it is, but it’s basically impossible to not use debt.

    Adding a certain amount of leverage to real estate can substantially increase the returns.

    I just like the idea of having a loan secured by an income producing asset, and the fact that someone else is paying off that loan for me. At the end of the day, it’s nice to have others essentially buying houses for me.

  2. Shirley says:

    As a youngster, my parents had a CC for emergencies only. As a young married with children, I had a CC to sometimes make sure the lights stayed on. 🙁 As a working mother, I had a CC for convenience and practicality. Now, as a retiree, I have 2 CCs to make money!

  3. Strebkr says:

    Last year alone, Chase cut me three reward checks for $250 each. So I ‘made’ $750 using my card last year. I didn’t increase my spending because of the card. I just used the card to make my normal purchases. I got a whole bunch back!

    • Maddhatter says:

      Yup clearly he missed the whole rewards part. I would wager that if credit cards did not have rewards, most people here would not have any.

      • zapeta says:

        Agreed. I’m sure I’d have a couple cards for emergencies but otherwise I wouldn’t use them if I didn’t get rewards.

  4. cubiclegeoff says:

    As was said above, it’s about leverage in many cases. But also, it can make a lot of sense. If I can get a 0% financing deal on something I’m going to buy anyway, I’ll do it. It’s a lot better than paying cash. Credit and debt are tools, if used properly they can be a great benefit, but if used incorrectly, they can just break things.

  5. I Can't Think of a Clever Name says:

    Prices on just about everything takes into account that one will use a credit card. Therefore, if you are using cash you are effectively paying more than someone who uses a credit card and receives rewards. That is, if you pay the balance every month and not pay interest. I earned $1,650 from my Fidelity Visa in 2010 and deposited it into my Fidelity IRA. That’s a lot of “free” money!

    • Strebkr says:

      Wow that is a ton of free. Congrats. That sounds like a pretty good card. Can you tell us more about it?

      • I Can't Think of a Clever Name says:

        FidelityÂŽ Investment RewardsÂŽ Visa SignatureÂŽ Card. You earn 1.5% for all purchases. If you charge more than $15,000 per year you earn 2% on all purchases. If you do the math, you can see that I ( my wife!) spends a lot of money. However, I do pay the balance off every month.

  6. DoubleD says:

    It took a while, but I am finally free of all debt except for my home mortgage. Just paid off my student loan. Thanks for all the advice and help making it happen.

  7. skylog says:

    i have to agree with this post. i won’t say debt is good for one, but, no doubt, having a card and using it smartly can have advantages. as with strebkr above, i also got several “rewards” last year for simply using my card instead of cash.

  8. poscogrubb says:

    You might also be able to argue that using a card to pay is “greener” because there is less demand to manufacture and ship green paper and metal coins.

    • NateUVM says:

      Same holds true for using a debit card, however. So that’s not really an argument for credit, per se.

  9. Don C says:

    CCs are way more efficient at helping you track your spending. If I take $500 cash out each month, I have no idea what I spent it on unless I keep a log with me everywhere I go. With CCs, I get a statement every month that tells me where it went.

    With rewards factored in, I pay everything under the sun with CCs, even utility and other household bills. I get at least $500 – $700 cash back a year in rewards.

  10. Some Guy says:

    Consumer debt: bad.

    Debt used to purchase a productive asset: maybe good. If you are getting a return on your assets that is higher than the rate you’re paying on debt, it makes sense to acquire as much debt (and thus productive assets) as possible. The risk is that your assets cease to be productive while you’re still servicing the debt (e.g. vacant apartment).

  11. Strebkr says:

    I think being able to track your spending would be reason enough for me to use continue to use my CCs even if they had no rewards attached.

    Knowing where your money goes is worth a ton.

  12. A point I keep making over and over whenever I hear this discussion: Credit cards let me deal with serious medical emergencies in my family on two occasions. As in, “Drop everything and fly thousands of miles to be there in a crisis.”
    Frankly, I don’t usually have enough in my checking account or even in liquid savings to deal with a long-term or particularly expensive emergency — and plane ticket plus rental car is VERY expensive.
    When the spit is hitting the fan, I don’t need to add more chores to the list. I want to fly out NOW. Later, I will find time to move money over from my online bank to my checking account. Right now? I’m heading for the I.C.U. and thank you, little piece of plastic, for letting me do that.
    Plus I like the mileage and the bonus points. 🙂

  13. eric says:

    I think credit is fine and useful if you use it to your advantage. That means PIF and not overspending. If you’re not discipline enough, stay away then!

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