Credit - Article 2.

IS CREDIT GOOD OR IS CREDIT BAD?

We left off last time with me asking you if you think that credit - the borrowing of money from another - is a good idea or a bad idea. We looked at a quote from Proverbs in which the Old Testament writer suggests that the obtaining of credit creates an indentured relationship with the lender. Would you take this Biblical admonition to mean that you should eschew borrowing: "The borrower is servant to the lender"? Proverbs xxii. 7

There is, of course, truth to the Proverb. And there are certainly those among us who do not use credit - no credit cards, no loans, no IOU's, maybe not even a checking account (a check, after all, is but a PROMISE to pay - it is not actual payment; so, by definition, the writing of a check is tantamount to obtaining credit).

These folk have simple financial lives indeed, and I applaud their good fortune. They are also unlikely to have ever had to purchase a home on their own, or they were born into a wealthy family that provided the funds necessary to avoid any need for credit. That'd be nice, wouldn't it? But it is an unrealistic possibility for most of us.

The rest of us will probably need some financial help in order to go to college or buy a home or start a business. And I do think that most of us can "handle" credit sufficiently to assume the "risk" of being a "servant to the lender".

Having determined to my own satisfaction that borrowing money is from time to time useful financial planning, I want to examine the circumstances under which I think it advisable and when it is NOT advisable.

WHEN NOT TO BORROW

Generally speaking, we get into trouble with credit when we borrow money or charge purchases that we cannot pay off out of our regular paychecks on top of our normal monthly bills (for things such as rent, utilities, clothes, auto). This is a function of several parallel issues, including the nature of the specific purchase made on credit, the interest rate charged, other current debts and liabilities, income and reliability of income.

When should we NOT be borrowing?

	When the useful life of the product or service purchased on credit does not last as long as it will take to pay off the debt - for instance, one should not put a vacation or a meal on a credit card when the credit card is not going to be paid off at the earliest opportunity;
	When the interest rate you are going to pay is so high that, when added to the price of the product or service charged, results in an actual price that you would never have paid for the item in the first place;
	When you cannot afford to pay the debt AND save money for retirement at the same time;
	When the new debt is used solely to pay off prior debt that you have been unable to reduce, unless you are somehow lowering your payment amounts; " When you are using debt to pay gambling losses;
	When you incur debt to purchase something brand new that you could obtain much more cheaply if you purchased a used product, such as furniture or an appliance or a car.

If you are hearing from creditors, it is unlikely that obtaining more debt will result in relief and it just may be time for you to prepare for bankruptcy (an option we will look into later on).

OK - I've suggested some guidelines to use when determining the time NOT to borrow. In our next installment, we will examine the opportunities I refer to as "good debt" (as opposed to these examples of "bad debt").