Say "yes" or "no" to credit?

In this recession, one thing that I have come to expect is a ton of articles speaking out against debt and credit cards. And there is good reason: Americans are addicted to debt, credit cards, financing, loans and mortgages. But one thing that is common and unwarranted among most of these articles is simply this: allegations that no debt is good debt.

For example I recently saw an article saying to stay away from student loans. Others say to stay away from credit cards. One thing for which no one seems to be accounting is that, while insane amounts of debt is what turns this country belly-up and caused the recession, it is also the ability to take on debt and finance large purchases that made this country as wealthy as it has become.

So for this article, I will be responding to a recent article called "9 reasons to say no to credit", telling you why it is still okay to say "yes" to credit, along with some caveats to keep in mind.

1. Financing your purchases doesn’t teach self control.

Financing your purchases doesn’t teach anything, but the author of the article dives into territory without the proper warrants, alleging that those who finance purchases don’t exercise self control, which is a generalization that is beyond wrong, but also alleges that those who finance purchases may allow their health to be compromised.


True that financing purchases won’t teach self control. But when you finance a purchase, you must take the monthly payment on what you’re financing into account. If you’re financing something with a credit card, plan in advance of the purchase on paying off the financed amount within a certain period of time and stick with that, wavering from it only when you have a damned good excuse.

2. Financing your purchases means you aren’t sticking to your budget.

This depends on how you’re financing things and why you’re making the purchase. Are you putting it on a credit card because you want it but cannot afford the entire purchase with cash? Or is it something you need and you cannot afford it with cash?

Plus sometimes things or services you need end up costing more than you can anticipate or afford. Without a backup of credit to cover that overage, you’re probably SOL. And if the overage you need to cover is the deductible on your car because you were the victim of a hit and run, then what do you do? You charge it.

3. Credit card interest rates are expensive.

And they are intentionally expensive. Credit cards are unsecured debt, meaning there is no collateral to secure the debt in case of default. This presents a higher risk on borrowing to creditors, and interest rates are directly proportional to perceived risk. Present a higher risk to lenders, and you will pay more for it.

4. Credit card interest rates increase when you can’t pay off your balance in full.

Quoting the article:

To add insult to injury, that great annual percentage rate (APR) you thought you had on your credit card might have merely been an introductory rate that was subject to increase after a certain period if the balance has not been paid in full.

And if you didn’t know this when you signed the paperwork, you have only yourself to blame. Contrary to popular belief, credit card companies don’t hide the fact that your interest rate is only introductory. It’s plainly written on the disclosures. You did read them before you signed, right?

But if your interest rate does go up and you are carrying a balance, the amount of the balance may be the factor that determined you to be a higher credit risk. The issuer likely didn’t raise your rate to get more money out of you, but as an implicit signal that you need to pay the balance down.

5. A poor credit score can affect your insurance rates, being accepted for a job or the ability to finance meaningful purchases like a home.

Quoting the article:

Insurance companies that check your credit score when considering your premium seem to assume that if you can’t pay your bills, you might be letting your car or home maintenance slide, or you might be an irresponsible person in general, all of which could make you a higher risk by increasing your odds of filing a claim.

This is incorrect. Insurance companies that check your credit report (not credit score, no one but you has access to that) may raise your rate because you’ve presented yourself as a greater risk of not paying your premium. So they may raise your premium to ensure they are the first to be paid. Your car insurance is one example.

Your credit report has little bearing on whether you let maintenance on your car or home slide. Many people with good credit may be poor at keeping up with maintenance on their car, and vice versa.

Some employers also run credit checks on potential job applicants, and an employer who is concerned enough to check your credit score will probably be concerned enough to not hire you if it’s poor.

If you will be offered a job where you will be directly responsible for cash or cash flows, expect a credit check. The reason for this is they want to determine what risk you might present that you’ll "skim the till". This is nothing new, either, and has been going on for a long time. Many employers also disclose whether they will be checking your credit, but it is not a good idea to ask an employer if they will because that might send up some red flags.

6. Poor financial habits can jeopardize your relationships.

This statement is too generalized. Many couples get into financial difficulties together, and sometimes financial difficulties are unavoidable, such as in the case of unemployment. They can jeopardize relationships, however, but that depends primarily on how you got into the difficulties to begin with.

7. Financing purchases can lead to higher spending.

Purchasing a $1,000 laptop might be easy to accept if you just sign a piece of paper. On the other hand, if you pay with cash, you can physically feel the $100 bills leaving your hand.

Major purchases should always be planned. For example my fiancée and I are planning a purchase of a new television to replace the over 5 year-old power-hogging rear-projection television we currently have with a more energy efficient LCD or plasma display of similar size to what we have. We know about what that television will cost, and we will be saving up to pay most, if not all, of the cost with cash.

Or to take advantage of a deal, we may borrow. It depends on how the math works out.

But the point is that we are planning the purchase, know what it will cost, and if we borrow, we will know before we buy that we plan to borrow and will have a payoff plan budgeted out.

But if you finance without taking into account that you are taking on debt, it’s your own damned fault. Realize you’re taking on debt, that you are borrowing money when you finance and treat it like debt.

8. In a worst-case scenario, the habit of financing your purchases can lead to bankruptcy.

If you go on enough spending sprees without a plan for paying them off, or if your plan goes awry because you lose your job, or get hit with massive medical bills, you may find yourself hopelessly in debt.

You can end up with massive unexpected expenses or no income even if you have no debt. It is a risk of living and participating in the economy. Live with it, account for it, insure yourself against it, and just go on.

9. Avoiding financing can bring peace of mind.

Not always. While it’s great to be out of debt — my fiancée and I are going to be celebrating when we pay off a settlement that has been sapping our budget — there are times where you are paying more not taking on debt. Every decision has a cost, and as many of those costs as possible should be taken into account when deciding whether to pay cash, borrow, or not purchase at all.

The bottom line

The convenience, protection and cash-back rewards offered by credit cards make them a handy tool if you use them wisely.

The truth is if you can’t really afford it, you may be giving yourself a gift in the short term, but you’ll be giving yourself an expensive headache in the long run.

The key words here are "if you use them wisely". There is no doubt that many people don’t. They don’t see credit cards as debt, don’t treat it as debt, and that is where the problems can arise.

Keep in mind that credit cards are debt that you will have to pay back, and how soon you pay it back determines how much you will have to pay. Make a plan for every major purchase and stick with it.