By: Mike Cashion, MFF Director of Operations
Credit is a really important part of our economy. There are many positive ways to use credit, but there are also not-so-positive ways to use credit that may be harmful to your financial wellness.
Good Uses of Credit include:
- Purchasing a home
- Paying for college
- Purchasing a car
Harmful Credit Habits include:
- Spending more than you can comfortably afford
- Carrying a balance
- Using it for the rewards points or programs, even when it actually hurts you
Credit is a double-edged sword
When most people in the United States think of credit, they immediately think of credit cards – revolving credit (credit cards). Our economy is built on credit (of all shapes and sizes) and confidence. Credit enables us to purchase expensive items that we would not normally be able to pay cash for on the spot, like a home. Credit allows for businesses to expand and grow. These are some of the good things about credit.
Even the items in the good category may become bad. This happens when someone purchases something with credit that is more than they can afford, is too costly, or it does not have much value. Some examples of this are buying a house that is too expensive for you to comfortably afford, pursuing an expensive college degree in a field that will yield little job prospects or has a high likelihood of paying poorly, etc.
As long as you run the numbers, are thoughtful about how you use credit, and pay on time, it is an AMAZING tool. Responsibly managing the use of credit will enable you to reach your financial goals.
Let’s talk credit cards
Because most people think of credit cards when they think of credit, we should touch on them specifically. Credit cards can be a great tool. But keep in mind that they are incredibly costly if you do not pay them off every month. Many credit cards offer really great rewards like cash back, airline miles, discounts, and much more. These rewards are great to earn. They are not great to earn at your expense. When you do not pay off the balance every month, you pay dearly for the sake of revolving the debt. Or carrying a balance over to the next month.
In numerous studies, it has been found that consumers will spend more when using a credit card versus paying with cash or a debit card. That is because you do not actually feel that the purchase is taking or directly deducting money from your bank account balance or cash in your wallet. It is important to remember that credit cards are great but are designed to make the banks that issue them money.
Let’s talk about good credit
Credit often gets a bad rap. Our economy is built on credit, confidence, and trust. Credit allows for us to borrow to grow personally, professionally, and via business ventures. I know friends who have leveraged credit to pursue higher education that opened up career opportunities and significant increases in earning potential. I know people who have used credit to responsibly purchase a home for their growing family and used the asset to increase their net worth. I know others who have used credit to invest in and grow their businesses, leading to more cash flow, higher margin, increased profit, more jobs, and additional products, and services.
Credit can be a wonderful thing. It is an enabler for those who understand it and use it wisely. Credit is not free. It always comes at a cost and with the expectation that it will be paid back. Do your due diligence. Think about what would make sense for you. Not fully aware of all of the various types of credit and how it works? You are not alone. Morgan Franklin Fellowship can help. Our Standards of Financial Literacy program, our signature course, further discusses this topic.
Become an MFF Fellow
Our Standards of Financial Literacy program is engaging, full of interesting information, and easy to navigate. Adapted from the National Standards for Financial Literacy developed by the Council for Economic Education (CEE), this robust curriculum features six short lessons on such important topics as earning income, the value of saving and using credit. When completed, this program lays the foundation to become an MFF Fellow.
Becoming an MFF Fellow is the ticket to accessing additional MFF programs and opportunities for mentoring, networking, internships and real-world opportunities. These are the opportunities which allow MFF Fellows to continue their journey to personal financial success.