Is All Debt Evil?by
Bill Barnwell When I was a little boy, I thought my mom and dad’s credit card was the coolest thing in the world. Oftentimes when I would ask my mom to buy me this or that toy, she would tell me that they just didn’t have any money. My logical response always was, "Well why can’t you just use your credit card?" In my little mind, the credit card was a magical device that allowed you to have anything you wanted, whether you had money or not. When I got out of high school and started going to church I began to hear about the evil nature of debt. "Debt-free living" was the goal I was told, so I reasoned that I would just never take on any debts. Scholarships allowed me to escape school debt, so I didn’t have to worry about paying back student loans. The cheap cars I drove I’d buy right off the lot so I never made a car payment. If I never had a credit card, I wouldn’t have to bother paying back those bills as well, I reasoned. I’d be "debt-free" and in much better financial shape than all those people who were maxed out on all their credit cards and defaulting on their loans. When it was time for me to achieve the American dream and buy a house, lenders would look on me with favor for being so responsible. It all seemed so easy! The only problem with the above, as any adult reading this should know, is that having no credit history is really no better than having a bad credit history. And once you’re an adult, trying to get credit when you have no credit can be a major headache. I realized this during college in my finance and economics classes in college. I wasn’t motivated enough to actually do anything about it until my senior year. Unfortunately, I waited until after college to take concrete steps to establish my credit (creditors are much more willing to extend a kid credit when he or she is in college, because they figure that their parents will bail them out if they run into trouble). Once I was out and living on my own I visited a personal banker and tried to sign up for a credit card. Not long after, a rejection letter came in the mail. Soon after that I visited a department store where I buy a lot of my clothes from. They asked me if I wanted to sign up for their store credit card and save 15% on my purchase that day. Sounded good to me, but once again, I was rejected. The explanation for both rejections? I had no established credit history for the creditors to determine how responsible I’d be in paying back my debts. I was furious. I had $10,000 in savings. I was never late in paying the bills I did have. I was a trustworthy young man who had just graduated college. I had held down some good jobs throughout high school and college. Why couldn’t they just give me a chance? At that point I remembered something. A couple years previously I had signed up for a lifetime gym membership. I didn’t know it at the time but I was suckered into signing up the first day I visited the gym by an aggressive sales agent who led me to believe that one could only sign up on their initial visit once they toured the facilities. I also didn’t know that the two and a half year payment plan was issued through the gym’s own finance company and charged uneducated people like me an insanely high interest rate. In my case, I had the ability to pay off the loan in a couple early large payments, but my time preferences caused me to opt for the lower monthly payments over a longer period of time. Right around the time I was trying to qualify for a credit card the gym debt had been paid off. I couldn’t understand why creditors wouldn’t give me any "credit" for making all my monthly payments on that loan for a two and a half year period. Shouldn’t that have counted for something? It should have, but the problem was revealed when I ordered my credit report. The loan was never reported. The aggressive sales agent who signed me up for the gym membership put down the wrong social security number when he was taking my application. Just one number was off. I never knew this until I bothered pulling my report. It took me two months of hounding the finance company to report the loan to the three major crediting bureaus. Finally the loan was reported, along with my payment history. Credit had been established. Now all of a sudden I qualified for a credit card with a $2,000 credit limit. After a year, I went from having no credit score to having a score in the mid 700’s (scores range from 350–850, and the higher the score the more creditworthy one is deemed). All this brings us back to the question of whether or not all debt is evil. The answer is, of course not. Unless you plan on buying a $150,000 home and paying all of the money up front, you’re going to need a credit score and a credit history to qualify for a mortgage loan. I know of nobody who can afford to just buy a house or new car outright without taking out some kind of loan. And if you’re a young adult reading this and you have no credit history, you’re going to need one if you ever plan to make these types of major purchases. Not taking the time to build a responsible credit history is just as irresponsible as establishing credit and then ruining it. For some wise words in regards to establishing credit and building up a good credit score read all the advice on this page. If you want a rough idea of the criteria that the three major credit bureaus (Experian, TransUnion, and Equifax) use to formulate a credit score, read the information contained here. There are many more intricacies that could be mentioned about credit scoring and what criteria individual lenders look for, but if you have a basic handle on this information, you’ll be better off than millions of Americans who have never taken the time to learn the basic facts. If you’re a college student who has never taken the time to establish your credit, now would be a great time to do that. If you’re a parent of a young adult and you know they have no credit history and lack basic knowledge in personal finance, now is the time to help them get on track (when I was in college I learned that many, not a few, students didn’t even know how to write a check). Take Junior to the local bank and have them fill out an application for a credit card from the issuer of your choice. If your son or daughter is responsible enough, you can co-sign on the card. Don’t do this, however, if you suspect that your little darling will have trouble paying their bills each month. If that happens, their debt becomes your debt. Sign up for a card with a low credit limit. If your son or daughter is an 18-year-old and a full-time student, a $500 credit limit will be sufficient. If your son or daughter is not in college and is working with a more steady income, then don’t go over $1000 for their first card. For the 18-year-old kid in college, explain to them only to charge their gas, food and other small expenses. Tell them to pay back the full amount each month, on time, to avoid paying interest. Even if they start with a no-interest introductory offer, it will be good for them to start getting in the habit anyway. If they do leave a balance, explain to them never to leave more than 30% each month, but preferable lower, especially if their credit limit is higher. Occasionally leaving a modest balance on the card actually helps, as long as regular payments are being made. However, I’d advise to only leave balances occasionally. If they are responsible enough, have them sign up for just one other type of credit card. For instance, a card issued from a gas station or a department store. Absolutely nothing else on top of this, however. At first, they’d probably be safe just sticking to their initial card. If they start making a little more money throughout college and want to make larger purchases, the card issuers will probably raise their initial low credit limits for them as long as they’ve been actively using their card and responsible with their monthly payments. By the time your son or daughter graduates college, they’ll already have several years of a solid credit history and score built up if they follow the above advice. The same goes for the young man or woman who enters the work world right out of high school and starts responsibly building credit in their early adult years. By being contentious and responsible, young people can build up good credit right out of the gate, instead of building up credit woes. Then once they get a good enough job, they can be buyers and qualify for a home mortgage that is within their means as borrowers instead of being renters indefinitely. Unfortunately, many young people will not follow this advice even if it is presented to them. Many parents reading this will blow it off or forget about it. You don’t have to be one of them. You can take the right steps and follow this commonsensical advice and put yourself or help put your children in a better position of financial strength. Debt is not evil. The misuse and abuse of debt is. Even a careful reading of the Bible will reveal this fact. We have two options. We can use debt to our advantage to increase our purchasing power, or we can be like the majority of people who use debt to dig themselves early financial graves. Debt doesn’t have to control you. You can control debt.
April 13, 2007 Bill Barnwell [send him mail] is a pastor and writer from Michigan. He holds both a Master of Ministry degree and a Master of Arts in Theological Studies degree from Bethel College in Mishawaka, Indiana. Visit his blog. Bill is also a Mortgage Consultant and Loan Originator who can serve clients throughout the country. Copyright © 2007 LewRockwell.com |
Why
not start to control it today and begin to make decisions that will
put you on the path to greater financial strength? Whether that
happens hinges upon your integrity, motivation, and your level of
discipline. Nobody can force you or your children to make the right
decisions. The ball is on your court. Take action now, not later.