Many people these days do their best to avoid using credit at all, and you can understand why. The 2008 financial crisis showed how catastrophically things can go awry when debt isn’t managed properly, and the general level of education on the topic of financial matters has improved since then due to the proliferation of online resources (like this blog, for instance).
And if you can stick exclusively to debit, then more power to you. It’s a smart and safe way to manage your resources — but you mustn’t make the mistake of viewing credit as an inherent evil, because that’s far from the truth. Credit isn’t even a necessary evil as there’s nothing evil about it. It’s simply an option like any other: it can be used poorly, or it can be used well.
In this post, we’re going to look at 4 common scenarios in which taking credit is not only viable but also advisable. Let’s get started, shall we?
Needing a good credit rating is by far the biggest reason to take credit on a regular basis. Even if you don’t want to borrow money on a small scale, at some point you’ll likely need to borrow it on a large scale — most notably through needing a mortgage to buy property — and your ability to pay it back will be inferred from your credit rating.
Not only will plenty of big lenders refuse to offer mortgages to prospective borrowers who lack proven histories of repaying credit in a timely fashion, but there’s also value in increasing your credit score further. If you go through a smart mortgage broker that uses machine learning to really crunch the numbers, then the higher your credit score is, the better your offers will be.
When you make a payment using a debit card (or through cash), that money goes away directly, and that presents a lot of issues concerning fraud. You might be in a foreign country, or just an area you don’t know, and be slightly worried about using a card to make payments. What if someone steals it and tries to spend everything you have?
If you have a debit card that gets stolen, the thief can make payments that are immediately taken from your account. By the time you report the theft of your card, it’s too late. This isn’t the case with a credit card: credit card payments charge the lender, and lenders have considerable resources to deploy when trying to get back money fraudulently spent. In essence, using credit gives you fraud protection directly from the lender.
Plenty of credit card providers offer rewards to encourage people to use their cards. Cashback cards are an example of this, essentially providing a marginal discount on every purchase, but you can also get various other perks by hitting certain spending targets. For instance, a particular card provider might give you a lump sum of redeemable points if you spend $2000 in a month.
That might not sound ideal because it leads you to envision the long-term consequences of borrowing $2000, but the point is that you only need to borrow it briefly. If you rack up that $2000 credit total then pay it off immediately after, there will be no negative repercussions whatsoever: you’ll earn your points and see your credit score improve.
No matter how frugal and financially-savvy you are, you can’t anticipate every eventuality. At some point you might become ill, and even if you’re fully insured against it, the wide-ranging effects (such as you being unable to work) could leave you struggling to make ends meet. At such a time, your determination to avoid borrowing could leave you in dire straits.
Things don’t have to get that bad to justify taking credit, though. What happens if you run a business and encounter cash flow issues due to a client payment being delayed? The money might be guaranteed to come in, but not in time for you to cover an important outgoing payment that’s due imminently. By taking credit and paying it back upon receipt of the client payment, you’d avert damage to your business with minimal fuss. If you’re concerned about making on-time payments while your cash flow is low, there are also apps that can help you keep track of bills and payments that are due.
As we’ve seen here, there’s nothing wrong with using credit to your advantage. Lenders might entice you with their rewards in the hope that you’ll let your credit payments lapse and owe them interest (and possibly late payment fees), but you don’t need to play into their hands. If you’re smart and observant, you can enjoy all the benefits of credit without having to deal with any of the drawbacks.
Borrowell® is a registered trademark of Borrowell Inc. All Rights Reserved. The Equifax credit score is based on Equifax’s proprietary model and may not be the same score used by third parties to determine your credit profile. The score provided to you for educational use is the Equifax Risk Score.
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