The 3 Commandments of Sustainable Credit Use
Debt has always been seen by society as something of a dirty word, and it’s not hard to understand why. It can easily become a millstone around a person’s neck, one which forces people to work longer hours, take on extra jobs, and never quite gain the freedom they seek.
On the other hand, it’s a matter of fact that debt has its role – possibly an essential one – in both personal and business finance.
It is possible to live without debt, but it will mean that there are some options you won’t have open to you in life. It’s difficult verging on impossible, for example, to buy a house without some borrowing. Purchasing a new car, equally, usually involves some financing.
As long as you can manage credit – which is, after all, just another way of saying “debt” – then it’s not something you need to swear off completely. You just need to be aware of the commandments of credit use…
#1 Stay away from high-interest rates
If you have a poor credit history or have never used credit, then your credit score may be low, and make it really tough for you to get a loan or card.
Often, the trade-off for borrowers in this situation is a “bad credit” account with a higher rate of interest. Of course, this makes it harder to pay off any amount they do borrow, which just makes things worse.
Research the top credit unions to see how you could get a better deal even when your credit score is low. Long-term, this will also help build your score for the future.
#2 If you can’t do something without credit, you probably shouldn’t do it.
As frustrating as it sounds, the best time to borrow is when you don’t need to. Of course, that’s not much use to those who need a quick solution, but here’s the deal.
If you can comfortably make your repayments, you will boost your credit score, making it easier to get credit when it really matters, such as a business loan or a mortgage. If you are in a period of serious hardship, it makes it less likely you’ll be able to make repayments, and borrowing is simply going to worsen your situation.
Seeking charitable help or declaring bankruptcy may be better moved in this scenario.
#3 Don’t carry a balance you couldn’t pay off in one go
Excepting the amount of your mortgage, the amount of outstanding debt you have at any given time should be manageable enough that if you had to pay it all back, you could. It’s advisable to be able to pay your balance off at each statement date.
There is a persistent argument that suggests carrying a balance on your credit card helps build your score, but there is precious little evidence to support this – and the risks it presents outweigh any benefit it may (or may not) have.
Debt needn’t be a dirty word; if you know how to manage it and use it to your advantage, then you can do yourself a lot of favors.
