There are a lot of so-called personal finance gurus running around writing books, and getting rich, all while teaching about the evils of credit. Don’t use credit they say. Don’t get the credit cards they say. Don’t take out loans or use other forms of credit. But they are wrong. They are preaching to the lowest common denominator of people with financial problems. Rather than teach about credit, what it is, how its used, and what it represents, they simply call credit a bad thing. But is it really or are they simply shouting at the lowest common denominator of their audience? I’ve heard these finance ‘experts’ say we should ban credit cards, do away with personal loans, car loans, mortgages, student loans, and so on. These ‘teachers’ tell us that credit reports shouldn’t matter, that we don’t need credit, that you should just pay cash for everything, save, save, save. It’s a lot of really bad counseling mixed with a lot of really good instruction and ultimately their financial advice just comes out jumbled and leaving a bitter taste in the mouth. So what is the truth?
The truth is that every single human being has credit of one sort or another.
Most people, when they think of the word credit they immediately associate it with the idea of credit cards, or credit scores, or loans. But these are actually all tools and measurements of credit. But what then is credit? Broadly speaking credit is your reputation, the amount of trust you have within a community, with regards to handling your personal financial matters. Think of a family with multiple children. Two sisters have each borrowed ten thousand dollars for school from their parents, each promised to pay back the entire amount as soon as possible. The first sister, we will call her Susan, uses her money responsibly. She immediately puts it in a bank savings account, uses what is necessary to pay for college tuition, works full-time to pay her living expenses, maybe adds a little extra when she can to that savings, and immediately upon graduation pays back what is left over and pays off her parents as soon as she can with her new career. Her sister, Helen, takes the ten thousand and buys a car, rents and furnishes an apartment, then takes out Federal student loans to pay for school, works part time and after graduation is unable to pay her parents back because she has to pay off student loans to the government. Now, five years down the road which of them has good credit and which has bad credit?
That’s all credit is. It’s your reputation. It is how reliable and responsible you are with the trust that people have extended to you. If you have good credit you have a good reputation with money and if you have bad credit you have a bad reputation with money. Now remember, reputation is based on what other people see and hear about you. For most people, their credit reputation is well-earned, for better or worse. For a smaller handful of people, and perhaps you’re one, that reputation was earned by factors out of your control. For an even smaller group of people, I believe the official number is actually less than 5% of total credit scores in the US, that reputation is actually false, at least in part, due to bad reports or identity theft. But it all comes down to your reputation, how trustworthy and reliable you are. And a bad reputation can keep you from getting certain jobs, getting a loan during a time of crisis, getting that car, house, or new apartment. A bad reputation can force you into a living situation that is far less than ideal – or flat-out unsafe. A good reputation, measured by a good credit report, can open a lot of doors even when you don’t make great money, because it says that you are reliable with what you have and that people and businesses can trust you do be responsible with what they are willing to loan you.
So what do we do this notion that you don’t need credit which some financial teachers are pushing? Well, if you happen to be super solvent, have a grip of money in the bank, no debt, don’t live a super lavish lifestyle – you can probably get away with no credit. Or at least you can get away without worrying about what your credit report says about you. However, if you’re a normal mortal like the rest of us, credit is very important. When I go to buy a house or refinance a home loan, I want the most options and the best rates, which requires good credit. When I want to buy a car, I want to be able to walk into a dealership and know that I can drive out with the car of my choice and be paying what I’m comfortable with, which requires good credit. If there is an emergency and I need to take out a personal loan, I want to be able to walk into the bank and walk out with the necessary funds to handle whatever emergency arose, which requires good credit. If you have good credit, which means a good reputation handling money, you’re going to have a lot more choices, better results, and better rates, when it comes to handling loans, credit cards, mortgages, etc. It is very much worth the effort to insure that your credit is as good as possible.
Credit Cards Are Not The Bad Guy
You know the old saying, “different strokes for different folks?” Well, there are different credit cards for different situations. There are credit cards out there that I wouldn’t touch with a ten-foot pole, because they’re not right for my situation. For example, I would never consider a credit card with monthly or annual fees. However, if you are just starting out, or rebuilding, your credit, then one of these cards might be right for you, especially for your first year or two of building up a credit history. The same goes for credit cards that are secured. And how about those credit cards with 20-30% interest rates – criminal right? But wait, why? Why are we attacking credit card companies for high interest rates? Think about this, if you have good credit, you don’t have to worry about that because your credit card probably has zero percent interest rates, or close to that. But if you have bad credit? The credit card companies are taking a risk extending you credit so of course they are going to charge more. Just like a mortgage company or a loan company will charge way more to people with a poor credit history. Like your friends who won’t loan you money anymore because you never pay them back, or take too long to pay them back. Consider this: if you’re using a credit card properly, you’re almost never going to pay interest on it because you’re paying it off every payday. And in the event of an emergency, you’ll pay it back as fast as you can so that interest should never have a chance to really accrue.
So look, credit, credit reporting agencies, credit card companies, they aren’t the big bad boogeymen that some people make them out to be. Your credit is 100% in your hands. If there is something wrong with your credit, fix it. If your credit is jacked up, work on it. But don’t blame credit agencies and credit cards for your mistakes, for your lack of responsibility. To put it bluntly- suck it up and handle your shit.
Credit is a reflection of who you are as an individual. It is a reflection of your level of responsibility, of the degree to which you can be trusted by other people with their money. Your credit is the measure of your ability to manage the resources in your life. What does your credit say about you?