Debt Free and Building Credit


Posted on : 9:52 AM | By : Anonymous | In :

It's been a huge relief to be out of debt for the past 6 months. A HUGE relief. Of course, there are drawbacks. Last night we had a big trip to Costco and in the parking lot Marshmallow (the '92 Geo Metro) wouldn't start. We've had the problem before, but my father-in-law fiddled with the starter and its been working every since. Fortunately our wonderful basement neighbor was watching the kids, so we weren't too inconvenienced. John went to call the tow truck (no cell phone right now either - we had a pay-as-you-go phone but haven't felt the need to renew it), and as soon as he came back and tried it, it started!

So we said, 'Hmmm... should we risk it? We still need to go get a few more things...' So we decided to risk it and went to the closest store, Toys R Us because I needed a couple of last baby things (namely a diaper bucket and a washable laundry bag, and some more nursing pads). When we parked, we tried the car just to see, and it didn't work. So he called the towing company back and they came to get us.

But even as we were standing there laughing at our 2-door hatchback that we'll soon outgrow (try fitting 3 carseats into the back of it), we realized we don't care about paying the towtruck because we don't pay a monthly payment. We've spent a total of $1000 on it, and had to tow it twice, and it's lasted almost a year. You can't beat that.

We almost got in debt for a vehicle last month, and rationalized that having a car loan would build up our credit. Fortunately, we didn't. But the thought is still there that we need some better credit if we ever want to buy a house. I've gotten a secured credit card (unsecured being against the rules) which I will never upgrade and will use only for things like gas and then pay off every month. This is a simple way to build some credit without having the temptation of a credit limit that's worth more than what you have.

Another thing you can do is get a line of credit on your checking account, and don't use it. What's interesting about credit is that your score isn't really about your reliability... its about how low they can make your interest rate to keep you in debt. If you keep getting more offers for loans, credit cards and overdrafts from your bank, they are trying to encourage you to use your credit more, because they feel like they can trust you since you're paying it off and not really using it. However, having a line of credit is just as tempting as a credit card. It's really not worth it.

What things in life do you really need to go in debt for? Nothing, except real estate or possibly a business. In either situation, having a tremendous savings is really the only way to go. If you've had a checking account with a bank for a long time, and have built up a reasonable credit history, and you've had the same job for a while, you might have enough credit built up to do what you want as long as you have a big down payment. Mortgages have the bonus of having the equity of the property to back you up, so they tend to be a bit easier to get than just a loan. And if you want to start a business, you should already have investors and savings of at least 50%, rather than starting with a loan first.

So the lesson here is to think about why you want to build credit... because if you're not buying a house or starting a business, it doesn't really matter. Credit is just another word for debt. If you have to borrow to buy it, then you don't really need it.

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