Jim Randel is the author of Street Smarts: Beyond The Diploma, which offers 125 real-world lessons on, among other things, how to manage money. This post was originally published on the Street Smarts blog.
Far too many commentators go overboard advocating a “no debt” approach to credit cards.
Yes, credit cards are seductive, and getting into credit card debt is so very easy. What’s more, credit card issuers can be tricky, maximizing profits by tripping people up with hidden or excess fees.
But avoiding all credit cards and/or debt is NOT a logical conclusion. There are good reasons for credit cards and debt. Here are just a few:
Debt is not the devil.
True, excessive debt is the devil. But America was built on the use of responsible debt. Entrepreneurs, developers, industrialists – debt was almost always part of the equation. Debt means risk. Reward and risk are two sides of the same coin.
Using a credit card to incur debt is not the enemy.
Using a credit card irresponsibly is the enemy. Businesses have been founded with credit cards. It’s even rumored that Larry Page and Sergey Brin maxed out their credit cards when starting Google.
Credit cards are all about float.
When you use a credit card, you have the use and enjoyment of a purchase immediately, but don’t have to pay for up to 45 days. This is called float, and it effectively buys you time.
The analysis is always the same: risk vs. reward.
By incurring debt, you leverage time and money. You buy something today that you otherwise could not afford. If the purchase’s utility or enjoyment is worth the cost in interest payments, then debt can make sense.
Like it or not, we are a credit-driven society.
The responsible use of credit cards will have a major impact on your credit score. Your credit score is critical beyond just the cost of borrowing (e.g. your insurance premiums and even your employability).
It is easy to attack credit cards and credit card issuers. Many issuers aggressively market credit cards and have put cards in the wrong hands. Some issuers have even been unfair and deceitful in billing practices.
Ultimately, though, using a credit card is an individual’s decision. If you can’t control yourself, then by all means cut up every card you have and never get another. But if you can deal with the prospect of debt and use it to your advantage, then credit cards can be a great convenience.