How Good Debt Builds Good Credit - dummies

By Steve Bucci

No doubt about it: Getting into debt can get you into trouble. Although debt certainly has a downside, borrowing money can also do a great deal of good for your credit record.

How to achieve goals with the help of credit

Debt enables you to take advantage of those opportunities and experiences that enhance your life: that dream home with the white picket fence, the around-the-world cruise, the Ivy League education, and more. When you can train your sights on your life goals and develop a spending plan that allows you to get there in the time frame you set, you’ve found the secret to the true value of credit.

Send a message to potential lenders

If you had no debt — ever — then you’d never have used credit, and you wouldn’t likely have a credit report or credit score. But let’s face it: In today’s world, living without credit is hard. Most people need credit to buy those big-ticket items — vehicles, homes, higher education — and they rely on credit for life’s emergencies.

Creating a positive credit history — a credit reputation, of sorts — says to prospective lenders that you’re a good credit risk. Showing that you can handle debt puts you in a position to receive the best rates and terms.

Using credit wisely not only is good for your lifestyle but also gives prospective creditors the opportunity to show you the respect you deserve based on your past performance. Lenders prefer to loan money to individuals who’ve borrowed before, who can show that they understand the commitment of credit, and who have a history of prompt payment and reliable follow-through.

In fact, given the choice between lending to someone who’s never borrowed before and someone with a history of debt — even with a couple of blips on the report —most creditors would favor the credit veteran over the rookie.

Think of it this way: Say your two 20-year-old nephews ask to borrow your car. One has never driven before, and the other has a four-year driving history, but got a parking ticket last year. Who would you give the keys to?

Give nonlenders a sense of how you handle responsibility

If you’ve had no debt and therefore have no credit history, you may find yourself disadvantaged in other ways. Many prospective employers check your credit record as part of the hiring process. If you have no record, they can’t confirm their good opinion of you.

Plus, they can’t use your credit history as a positive factor when deciding whether to hire you. Without that credit record, they lack an additional tool when comparing your application to those of other applicants.

The same holds true when it comes to renting an apartment, applying for insurance, and so on. If you have no track record, you’re an untested risk.