The Proper and Improper Uses of Credit and Debt

If you've ever felt the stress and burden of carry large amounts of debt, you may have asked yourself why such a system like consumer credit ever existed in the first place. It may seem like a tool of the devil when you've indulged your way into a hole you won't be able to climb out of without the help of a bankruptcy trustee, but there are actually good and practical uses for using credit to buy things.

There are also lots of bad uses for credit. Everything we do has some sort of payoff, and one of the lessons of growing up is learning which payoffs to aim for and which to avoid. Credit is a privilege and not a right, and it is all too easily abused by using it to indulge in short term payoffs. Unfortunately, the long term penalty, bankruptcy, is a severe restriction on your finances that is very hard to catch up on later in life.

But if you aim towards the right payoffs, going into debt can be the smart strategy. Several of the major milestones in life, like going to college, buying a car, and buying a house, are typically financed by incurring debt. Credit is how we pay for large investments. Henry Ford introduced automobile financing so that his customers wouldn't have to spend their life savings on a Model A. The payoffs for these investments are all worth the significant costs they involve.

Some of the other reasons people have for using credit have positive uses and outcomes. Credit cards allow you to make secure transactions over the Internet or by telephone. While this may lead to dangerous shopping habits later, they make your life more convenient. Also, using credit cards responsibly demonstrates to creditors that you are financially responsible and builds your credit rating, which enables you to be entrusted with more credit when you need to make a large investment.

When you aim for the wrong payoffs, going into debt is a dangerous slippery slope. If you are not going to enjoy a significant long-term payoff from what you are purchasing with credit, you shouldn't be spending money you don't have to get it.

Wanting something right away is not a good reason to use credit. Assuming that you'll have more income in the future so you can pay for it later is not a good reason to use credit. Replacing expensive appliances by putting them on a credit card because you haven't been saving money in an emergency fund is not a good reason to use credit. And, of course, ordering food for delivery or going to a restaurant because you don't have the energy to cook is not a good reason to use credit. If you need a quick meal in a fix—that's why frozen dinners were invented.

The right philosophy about using money you don't have is key to ensuring that using credit doesn't end with you seeking out the services of a bankruptcy trustee for a consumer proposal or to file for bankruptcy. You can use credit to your advantage, but if you're not pointed in the right direction, any steps you take are heading towards trouble.

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