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Credit & Debt Are Good For You (In Moderation)

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 [3] 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 [4] 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 [5] 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 [6] 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.