Yesterday I posted a reader comment on the virtues of a debt-free lifestyle. This prompted responses noting that debt-free living creates its own set of problems, and that responsible use of credit can be a valuable tool.

Greg C wrote:

Some people think credit = debt. It does not. Anyone who can budget can use credit the same as cash. You can also get credit cards and never use them. Millions of people somehow manage to do this. Sure going into perpetual personal debt is not good, [but] not all debt is bad.

Emily H wrote:

It is misleading to treat credit history as something that doesn’t matter. You can live without a credit history, but it’s hard. Maybe as hard as managing credit responsibly.

And jpsfranks wrote:

A lot of those advocating the no-credit approach are those who have had problems abusing credit in the past but who have now reformed. This implies they have some credit history, and if they tied things up well in the end, they probably have a decent credit history. If you have good credit but no longer use it, it may be misleading to tell folks with no credit that they don’t need it based on your own experiences.

These are excellent points. I concede that I am, as jpsfranks notes, a reformed credit abuser. My debts are not gone yet, but they soon will be. After that, I hope to live a debt-free life. But my existing (excellent) credit history will make things easier should I need to borrow in the future. Plus I’ll continue to carry a mortgage. It may be disingenuous for me to promote a debt-free lifestyle when I have an established credit history.

Meanwhile, a recent article from Smart Money, “Being debt free isn’t always all it’s cracked up to be”, echoes the same themes mentioned by Greg, Emily, and jpsfranks:

You’d think those who manage to be completely debt-free are living on easy street. That’s not necessarily the case. Living a debt-free life comes with its own unique set of challenges. After watching a debt-free friend be turned down by every mortgage lender around in part because of his lack of credit history, Leckband now reluctantly owns a credit card that he uses occasionally to keep his credit history active. The fear, he says, is that one day he may need a loan — the four-wheel drive on his 12-year-old car has gone kaput, making him worry that a car loan may be in his future — and he doesn’t want to find his options limited. “You’re expected to have debt to get debt,” he gripes. Some experts take this further, saying that living a debt-free life isn’t only potentially a hassle, but can be a big financial mistake.

Among the problems associated with a debt-free lifestyle, the article notes:

  • Without debt, you have no credit history. Many lenders won’t grant mortgages, for example, to borrowers without a credit history. And usually those who will loan money in these cases do so at less favorable rates.
  • Some debts are better than others. “Mortgage and student-loan debt are generally fairly cheap, and leave you with an appreciated asset. Plus, the interest you pay on these loans is deductible. Having this kind of debt can actually get you ahead if you invest extra cash rather than put it toward your loan principal.”
  • Debt-free living can create cash-poor situations. I confess to not fully understanding this point. The author seems to imply that you should consider incurring debt to subsidize retirement. This baffles me.

I have elected to pursue a debt-free life because I believe that’s the best choice for me. But it’s not the only choice available. Ultimately, the important thing is to manage your money responsibly. Whether or not you use credit, to gain wealth you must spend less than you earn.

[Smart Money: Being debt-free isn't always all it's cracked up to be]

This article is about Choices, Debt