Using credit may seem like a bad idea, but there are some good reasons to use it. Even with the responsibilities of owing creditors and the costs of interest, debt often makes financial sense when it puts you in a better overall financial position or improves your quality of life.
Establish Credit
When you apply for new credit, your lender runs your credit report. Showing little or no credit history limits your chances of getting new loans at reasonable rates. One way to safely build credit at an early age is to get a low limit card and build a payment history. Parents can help their teenage kids by signing up for a joint card and then encouraging them to make periodic purchases and pay balances right away. Payment history is 35 percent of the FICO scoring equation, according to the MyFICO website.
Asset Purchases
Buying a house or car with loan financing is routine in the United States. For many consumers, it is psychologically acceptable to make monthly payments to pay for these large purchases. Financially, though, it makes some sense too. Secured debt typically comes with much lower interest rates than unsecured loans. Plus, home loans are usually tax deductible. This reduces your net borrowing costs since you get some of the interest money back at tax time. When you pay off the debt, you have an asset with real value.
Major Purchases
Along with major asset purchases, some other investments financed with credit are reasonable. College students often borrow money to get an education. The average college graduate earned $22,000 more annually than a nongraduate as of 2008, according to The College Board. Home renovations or repairs or small business start-ups are also commonly financed. What sometimes makes these types of investments sensible is the use of a home equity loan or line of credit. Like your first mortgage, these are home-financed loans that have lower rates and usually tax-deductible interest.
Promotional Offers
Using credit for nonessential purchases is generally frowned upon because of the high interest rate on credit cards. However, buying big-ticket items like TVs or furniture with credit is practical when you receive a promotional offer. Some retailers offer zero percent financing if you repay the debt in a period of six to 24 months. You may also receive a promo offer from a credit card provider where new purchases have a zero percent interest for 12 months.
References
Writer Bio
Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.