These are the principles that my (lived through the depression) grandmother taught me as a young child, and every time I’ve ignored them, I went wrong.

The only situations I’ve encountered where it was difficult to deal without credit were in having to pay a higher deposit for utilities, cell phone, etc. These are managable figures that have run less than $175.

Oh, and btw: I’m not rich, my partner and I make about $12K a year combined. It’s not impossible, and it doesn’t take insane willpower, it just takes the belief that the world doesn’t owe you something you can’t pay for. And I don’t write checks for thousands of dollars. (Although this *is* normal!) Checks can and will bounce, and have even when my account had enough funds. I use cash. I write two or three checks a month when I need a paper trail. Otherwise, cash is what you need.

Because I don’t know about most of you, but I’m not in the habit of writing checks for thousands of dollars.

Personally, my view is this. If you pay 0% interest on the money you borrow, then it is good debt. (Assuming of course, it makes sense to be buying the item in the first place.) If someone wants to give me money and not charge me for the time value of money then by all means. When I bought my last car, the auto industry was all with the 0% loans. You bet I took that loan. It’s about the only way borrowing money to buy a car (a fast depreciating asset) makes sense.

I view credit card float methods the same way. The trouble with them isn’t in the fact that you have borrowed money for a month, but in lacking a budget discipline. If you only spend the bills in your wallet, then how much you put in your wallet asks as a budgeting checkpoint. The problem is that putting credit cards in your wallet can be like slipping in a few dozen thousand dollar bills. If you don’t have any other budgeting disciplines in place, you can end up in a world of hurt. In fact, I try to tell people who have multiple cards (and admittedly I don’t follow my own advice always) to not carry all of them with them. That’s not to say you can’t get into a world of trouble with the credit limit of one of them, but it at least reduces what’s available to you when you are actually at the point of sale.

I also view as “reasonable” debt (as in, it could make sense to carry it), debt that is associated with a transferable asset that has chances for appreciation. I view my mortgage that way. If you normalize my former rent with my now mortgage based on the differences in my living spaces, I think they are roughly equal. Sure, I don’t think it makes sense to view your primary residence as an investment vehicle. But I do have the advantage of knowing that I will recoup my “rental” expenses, the loan’s true cost is reduced by the tax breaks, and if I live hear long term I may have achieved lower living expenses for retirement times by owning outright. If things ever got real bad, I could sell the house.

I have to agree with some above about student loan debt. No doubt, the studies show that advanced degrees can significantly boost earnings. But the problem is that it isn’t a transferable asset. I can’t sell to you my degree to pay off that student loan. I could do that with my house. In that sense, I try to advise people to know what they are doing before they take out significant student debt. Because the debt load may force you into job choices that you discover you wish you didn’t have to make on the basis of what can cover you debt obligations.

Debt free means not having consumer debt, not, not having a credit history.

You can’t calculate your credit rating - the formula is proprietary. you can’t leave - there’s only one that everyone uses.
it’s not advertised — you have to pay to see it. to fight mistakes involves notarized forms and freight mail, not 1-800 numbers and cajoling some person with a crappy job.

finally, the default difference between a good credit rating and a bad one is only around 2%, so the rating agencies tweak their formula to make it seem bigger, and more valuable, than it actually is. and the consumer is the the loser.

Consider:
———————————————
10% on a $100,000 home. If it appreciates 5% a year you put down $10,000 and you make $5,000 the first year…that’s a 50% return on your investment.
——————————————–
No you don’t, unless you skip out on all your payments, but are still allowed to live there. Your montly payments (not including PMI, for less than 20% down) is around $7000 per year at 6%. So in year 1, you paid $17k, not $10k.

Anyways, your investment is $100k. That’s your mortgage. $5k on $100k is around 5%. that’s assuming you could sell for $105 with no closing costs. God, Robert Kiowasaki is gonna kill people with his bs math. I know that’s where you got that from.

Assuming you had $100k to either buy a house or invest in a money market (from a money-only standpoint), i’d take invest, because a money market will get you 5%. Most years, the stock market will get you more.

That’s also completely ignoring the fact that you can borrow money to buy stocks, the same way you can with a house.

Also, your total interest outlay over 30 years would be $100k, so for a $100k house, you paid $200k in total. better hope it doubled in value. at 5% gain per year, you’d be in the hole, because your interest was 6%, remember?

Finally, unless you had other deductions (kids), at 6%, the standard deduction would be pretty much the same as interest, so there’d be no real gain there.

In terms of those who are debt free, “cash poor” refers to the old timey notion where things had to be paid for in cash, or you couldn’t leave. in these days of home equity, credit ratings, and lines of credit, its not a problem anymore for those who are debt free. they are probably decent at money management, and can handle an interest payment if one is *required* for medical or a family emergency.

However, the greater risk for those who are debt free, and got there by being frugal, is not being “cash poor”, but rather being under insured for when situtations arise that current cash can’t cover, like medical emergencies. make sure you aren’t neglecting insurance needs to squeeze a bit more out of your paycheck.

I stumbled across this while looking at ways to restrict my exposure to internet fraud. Cheers.

I couldn’t agree more. For people that can budget to pay off their credit cards, they can get an interest rate of up to -5% on some purchase and -1% on most others. My credit card is giving 5% back at gas stations, grocery stores, and drug stores.

So let me get me get this straight, you are going to pay me 5% to take your money for the short term. I think I have to take advantage of that.

It’s funny, a friend of mine who is remarkably nonchalant about debt looks at it this way: when you need more money than you have available, you buy some. Interest is the cost of that additional money. When he needs (or wants) to buy some money, he shops around for the lowest-cost money he can find (i.e. the loan with the lowest interest rate) and he calculates how much he’ll have to pay for it, which means that with credit-card purchases he sets himself a time horizon over which he’ll pay off the money he’s borrowed. I’ve argued with him that debt in and of itself (setting aside the issue of interest) has a cost too, since he could be investing that money and earning interest on it instead, but he dismisses that idea because he knows he wouldn’t have invested it anyway. I’m not recommending this philosophy by any means, but I thought it was an interesting way to look at it: you buy money and the interest you pay represents the cost of that money.

Our goal is to be debt free. The only debt we have is our mortgage. We haven’t borrowed any money in 4 years and we’re not planning on every borrowing again. We have cash saved for my next car, for example. We’ll never need to get a mortgage again, so we’re not worried about our credit score. We intend on paying for my kids’ college with cash. We have 6 months of living expenses in an emergency fund. We have substantial retirement savings even though we’re only 37 and 35. By the time we are in our mid 50s we’ll have zero debt and considerable assets. Without debt, we’ll be able to do whatever we want.

In our situation, I can’t think of scenario where borrowing money would help us.

Secured debt (i.e. mortgage on primary home or on investment home that is appreciating) is good debt, but still debt that I want to pay off.

I think of car loan debt as not so good secured debt b/c the car is generally losing its value.

Most people will strive to become debt-free at some point in their lives; ideally, this will be prior to retirement. My only debt at the moment is my mortgage, which I’m aiming to pay off by the time I’m 40. I still have other forms of credit, however (a credit card and a line of credit), but my credit card is paid off every month, and I rarely use the line of credit. In my situation, when I reach the point of being “debt free”, I’ll still have an outstanding credit rating, and be able to acquire new debt if I choose to do so, without problems.

Someone who tries to live a debt-free lifestyle from the beginning will not be likely to obtain a mortgage, and they may have other difficulties, such as not having a credit card to check into a hotel (I’m not sure if a debit card can always be used for that purpose).

In any event, the best of both worlds is to become debt-free as soon as possible, but to still maintain some credit, even if it’s not used often.

If I was a lender and an applicant didn’t have a credit history, I’d assume that they think that they can’t use credit responsibly (from my point of view). That is that they would default. I have no evidence to the contrary.

Credit is, in concept, an extension of trust, and your credit history tells about how you much you have been trusted and how you have used (or abused) that trust. I can see why it is used such a lot and is important (but almost never life threateningly so).

If you truly wanted to be debt free and a good credit history then you need to show that you do indeed have self-control in your use of credit. You can even do this by pre-loading your credit card.

Living debt-free doesn’t imply not having credit. It implies not using it.

I guess I’m pretty conservative in this area, but other than buying a house I’d prefer not to borrow to invest. People talk about taking out 2nd mortgages (or not paying extra on the first mortgage) so you can invest and make 10% over the long term. However, I’d much prefer to get the solid 6% from making extra mortgage payments than to gamble that I’ll get 10% over the long term. The problem is that the ‘long term’ could be quite a ways off and in the short term you could have some sort of emergency which requires you to take the money (borrowed money that you’re already paying 6% on anyway) out of the market at a loss.

A lot of people ‘borrowed to invest’ just prior to the great depression and it wiped them out. All this talk about borrowing to invest makes me nervous.

However, I would find it hard to believe that a person could afford not to get into some “investment” debt which creates an appreciable asset that can provide income and capital growth.

One of the main principals I feel that are imperative to creating sufficient wealth in your lifetime to retire when you want is to BORROW TO INVEST, as opposed to BORROW TO LIVE. By gearing/leveraging into an investment you will access potential capital growth that would be otherwise unattainable.

Worst option : Drowning in debt (and maybe adding to it!)
Better option : Debt free
Best option : Responsible credit user

As a recent article on GRS pointed out, some of us are more likely to be responsible users than others. If any person has a history of mis-using debt, then debt free is the way to go. For those of us who are capable of using debt wisely, either option (responsible credit use or debt free living) works.

Subsidizing retirement might also mean a reverse mortgage.

Also, a mortgage can allow you to purchase a home that you otherwise couldn’t buy. By the time you retire the home will probably appreciate and so you may have a lot of money for retirement you can access by selling the house and moving into less expensive housing (ie in another area or a smaller home).

Lastly, when you consider the tax deduction for mortgage interest the 6%/10% example becomes even more compelling.