I feel that 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, the logical conclusion is not to avoid all credit cards and/or debt. There are good reasons for credit cards and for debt. Here are a couple of the headlines:
- Debt is not the devil. Excessive debt is the devil. 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 started with credit cards. (It is rumored that Larry Paige and Sergei Brin maxed out their credit cards when starting Google.)
- Using a credit card is all about float. By using a credit card you buy time. You purchase something on January 1st. You have the use and enjoyment of that purchase immediately. Based on where you are in your credit card billing cycle, you do not have to pay for your acquisition for up to say 45 days. Those 45 days are float -- the period between when you enjoy something, and when you have to pay for it. But that is only the first part of float. If you cannot pay for it (or do not want to) when payment is due, you have to pay interest on the debt you are financing with your credit card. The real question is whether the interest you are paying (and the resulting pain) is worth more to you than the enjoyment you receive from the purchase you made on January 1st (until final payment is made).
- The analysis -- whether with credit cards or any other type of debt -- is pretty much always the same: risk - reward. By incurring debt you allow yourself to leverage time and money. You buy something today that you either could not afford or, you buy something today larger than you could otherwise afford. If you can use or enjoy what you purchased to a degree greater than the risk (that you cannot repay) and/or pain (the interest payments), then debt can make sense.
- One last point: 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 can be critical to your life beyond just the cost of borrowing -- e.g., the premiums you pay for insurance and even your employability. The key, of course, is to use the credit cards/debt in a way that enhances your credit score.
It is easy to attack credit cards and credit card issuers. Many issuers have been overly aggressive in marketing credit cards -- putting cards in the wrong hands. And some issuers have been unfair and deceitful in billing practices. But, ultimately, the use of a credit card is an individual decision. If you are one who will not be able to control your usage, 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.
Jim Randel is the founder of Rand Media Co. and the primary author of The Skinny On Book series. His latest publication titled Street Smarts teaches 125 critical life skills that are not traditionally taught at universities.