Wednesday, August 3, 2011

Debt, Credit and Hiding Under the Bed

We've established that I am terrified of debt. I generally think this a good thing. It keeps me from buying that gorgeous pair of $300 shoes and from fronting $100,000 that I'll never be able to earn back for that Ph.D in English Literature that I'm dying to spend the next 6 years working on.

But maybe it's not always a good thing. Maybe when it's time for me to buy a house, and a loan officer hands me a pen, I'll scream like he's the crypt keeper and go hide under my bed. Thank heaven for the Grige! He frequently says things like "good debt", "opportunity cost" and "well, do you want to raise kids in our one-bedroom aparment?".

So when is the time right to drop some real money, and what are the kinds of things you should feel okay about going into debt for? My first thought is that a house, car and maybe educational debt are the only kinds I could handle. But maybe there are other things we should go into debt for. Maybe that payment plan for the nice sofa is worth it, and perhaps it's okay if you can't pay for every piece of your wedding all at once.

The problem is, it's hard to tell the smart deals from the gimmicks. It seems like every retailer I visit wants me to sign up for their special credit card deal, and every time I make a large purchase, someone is trying to talk me into a payment plan that I don't need. How can one possibly make a smart decision while being bombarded with propaganda?

I tend to take a conservative approach, and given the economy and the fact that I'm still pretty early (read unstable) in my career, I think that's best. The following are some guidelines to keep your finances under control, but still get the things you want:  

·         Pay your balance. I didn't have a credit card until I was 23. I only caved because my credit rating was in the toilet, and I still use it exactly like a debit card – diligently paying my balance every month. It's annoying, but our society demands that we pay for things with credit instead of money we have. Just make sure that you don't put anything on your credit card that you wouldn't charge to your checking account unless it's an extreme circumstance.

·         Stick to one card.  I know it's tempting when you are checking out at your favorite retailer and they offer you an additional 15% off, but you have to remember that it's part of a business strategy. The whole reason the store is pushing that card on you is because statistically, you will spend way more once that card is in your wallet. according to researchers at the Federal Reserve Bank of Chicago, "the initiation of a 1% cash rewards program yielded, on average, a $25 reward each month and an increase in spending by $68 a month and in credit-card debt of $115 a month." I have been on both sides of the checkout counter and I've found that "no thank you, I'm not interested." will keep most salespeople from hassling you too much. You definitely don't owe them an excuse, it's your money and your credit rating.

·         Save first, buy later. Maybe you can't save the full amount for your goal, but you should spend the time to at least tuck away a good down payment for big events or items. This way you can get in the habit of making payments while earning interest, instead of paying interest.  

·         Only take advantage of a payment plan when you need to. If you are purchasing furniture or large electronics, there can be some great payment plans available to help you get what you want. Keep the timeline on the payment plan as short as possible and only buy one large item at a time. Once you have paid it off, you can move on to the next big purchase.

So perhaps it is okay to accrue some debt to get the things we want and need. But if you max out your credit to buy that new furniture set and then get bedbugs, how are you going to pay the exterminator? With a little patience and a conservative approach, there's no reason you can't do both.

Yours in the Red,
Double E

You can read more about the Federal Reserve Bank of Chicago article here: 

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