You Need to Borrow Money

It may say more about the state of affairs in our society and our economy than anything else, but the truth is that you need to borrow money. Lending and credit have become such integral parts of the way our society does things with money that your entire financial reputation is not based on how you manage your money; it’s based on how you manage your credit.

However, before you can show someone your credit history, you have to first develop one. And that means borrowing money.

Building Your Credit History

At some point, most of us will need to borrow money for something. In many cases, this “something” is often a large purchase. Yes, it is possible to save up for 15 or 20 years and then buy a home with cash. For most of us, though, that is an impractical solution. Borrowing to buy a home makes more sense. If you went to a lender, though, and applied for a mortgage without ever having borrowed money before, you would be rejected for that home loan.

In order to prepare for the day when you decide a loan is what you need to buy a home (or, in some cases, a car), you will need to borrow money now. I’m not saying that you should go crazy and borrow for everything. The key is borrowing smart, and managing your credit in such a way as to be responsible. This requires self-discipline and planning. Some of the loans that you can take out now to help you establish a credit history include:

  • Student loans
  • Car loans
  • Personal loans
  • Credit cards

Unfortunately, the most effective of these loans is often the credit card. This is because a credit card represents revolving debt. You can use as much money as you want, up to the limit on your card. As long as you keep paying down the balance, you can keep borrowing. With other types of loans, you make regular installment payments after receiving a lump sum for a specific purpose. It takes longer to build a credit history with installment loans than with a revolving account.

With careful budgeting, it is possible to put small purchases on your credit card, and then pay of the balance regularly. You get bonus points if you are willing to pay a small amount of interest and take two or three months to pay off a balance. If you want to buy a new computer, and you save up for it, you can put it on your credit card, and then make two payments with your saved up funds to pay it off quickly while building credit.

You will also have to make all of your payments on time. When you make your revolving and installment loan payments on time (my first loan was a car loan co-signed by my parents) that helps you build credit. Even though utility companies won’t report your on time payments, they will report your missed payments to credit bureaus. That means that all of your bills need to be paid on time if you expect to show that you can manage your obligations.

Who Looks at Your Credit History

Your credit score and history aren’t just for lenders — and that’s one of the reasons that building a good credit history is important. Several folks are interested in your ability to manage your credit. Anymore, service providers including cell phone providers, Internet providers and satellite/cable providers, want to know that you have good credit. Even though you aren’t borrowing, you could get denied service if your credit score is poor. Others interested in your credit history can include employers, landlords and insurers. Without a good credit history, you could be rejected for a job, or charged more for a security deposit or insurance premium.

It is true that you could probably get through life without a credit history. But it would be hard going, and you might not have access to some of the things you want. In the end, you will probably have to borrow money at some point, if only to build up a credit history that can save you money in other ways. Just remember to follow these rules when borrowing:

  • Borrow as little as you can get away with.
  • Aim for modesty when buying things like homes and cars, and paying for education.
  • Pay back your loan as soon as you can.
  • Shop around for the best possible terms.
  • Don’t borrow for everything; make a plan for what you want to borrow for.
  • If borrowing for a specific, reasonably small purchase (in order to build credit), save up the cash first, and then pay off the loan quickly.

 

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Comments

  1. says

    Agreed, financing is a huge part of life. I am on a mission to help people learn how to become their own banker and learn how to become their own source of financing. You can learn more at Becoming Your Own Banker 101 – http://www.byob101.com.

  2. says

    I would politely point out that you don’t have to borrow money. Well, perhaps for a 15 year mortgage… but that would be the only reason. All the other loans mentioned could be paid using cash… assuming someone made a decent income, paid off their debt, and saved like mad.

    We really need to get rid of the mindset that we have to borrow and take on debt… we do have options… we can say no thank you. Prior to 1950, lots of debt was rare… home loans were rare, car loans were 12 months or less.. .and credit cards did not exist. So people had little or no debt and they lived just fine. The good ole days. I think we need to get back to this “do not borrow” mindset. It won’t be easy…. but it is doable. :)

  3. Mitsy says

    While some of these “tips” are good (and kind of obvious) for most people, it’s unrealistic for many of us to try to buy a car (or other major purchase) without getting a loan. I don’t know about the rest of you, but I don’t have $10,000 just lying around. Sure, you can spend a lot less on an older car (and I’ve driven my share of clunkers in the past) but if you need reliable transportation, driving an older car isn’t going to cut it. Chances are good that you’ll need a loan for the car and that’s just the norm for most people. I’d suggest saving at least $1,000.00 for the car &/or sales tax, but otherwise, a car is a major purchase but something most people need in order to continue going to work. I pay about $300 extra a month on my mortgage and will have it paid off in a little over 5 years. So, it’s good to have goals & be working towards paying things off, but don’t insinuate that being in debt is something for the ignorant because most of us have debt and paying cash for everything just doesn’t work for a lot of people.

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  5. says

    I would agree that borrowing money can be a great way to improve your financial situation in many instances but I would not go so far as to say that it is completely necessary all the time.

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