Should I Borrow Money?

This is one of the most loudly debated questions. Everyone knows someone who has fallen prey to "easy credit" and overextended themselves. I had a girlfriend who used to sit at the kitchen table trying to decide which credit cards to make minimum payments on, and which would have to wait until next month. She simply couldn't keep up with her debt.

There are lots of books written about the evils of borrowing (never borrow), how to get out of debt (stop borrowing) and how to stay out of debt (never ever borrow again). The fact is, credit is a way of life and if we try to live without it, it becomes very hard to accomplish our goals. After all, does anyone you know have the cash to buy their first home outright? If you want to buy a house, you'll probably have to finance it. The same is true if you want to buy a car, or a boat, or a new kitchen. The fact is, credit isn't bad. How we use credit is the problem.

If you grew up during the thirties, forties or fifties, you probably grew up in a house where borrowing had a bad name. Our parents recognized that they had to save. They paid cash for almost everything they bought. They were willing to wait until they were well-established before they bought a house. If you grew up in the sixties, seventies or eighties, you probably grew up in a house where borrowing was considered the only way to get ahead. People leveraged investments. They took on huge debt loads. They wanted it all — TODAY!

The road that runs somewhere in the middle of these two extremes is the best path to take. The difficulty is that most people don't understand how to use credit to their advantage. They react to their circumstances, and they keep reacting as they get further and further into debt. When the debt becomes unmanageable, they throw their arms up in despair and say that credit is evil. Well, it's not. Well-planned borrowing can be a useful way to realize dreams and achieve financial goals. Well-planned borrowing can get you where you want to be. But it takes a good understanding of how credit works, when to use credit, and which type of credit will make borrowing work for you.

Often, when I begin to talk about credit, people have a number of reactions. Some run and hide. Others curse a blue streak, flailing their arms. Some smile smugly — it seems they know the secrets of credit.

I believe if we understand credit, we can learn how to use it to our best advantage. So here it is — The Borrower's Answer Book: everything you wanted to know about borrowing, but were afraid to ask. We'll look at:

I remember walking into a trust company one day to do some routine transactions when the branch manager cornered me. Evidently the push was on to sell Personal Lines of Credit (PLCs). Wouldn't I like a personal line of credit? Did I know how convenient and discreet a PLC was? Wouldn't I want a source of credit that offered the lowest rate of interest?

I informed Mr. Branch Manager that "I don't buy credit." (That's not exactly the truth, but it's what I told him.) He looked at me aghast.

"Don't buy credit!"

"That's right," I said.

"What about if you see that perfect piece of furniture and you don't have the cash?" he asked.

"I don't buy it," I replied.

"Pardon me?"

"I don't buy it," I said, "not until I've saved the money."

Mr. Branch Manager shook his head and walked away. Clearly I was a lost case.

You see, I believe that when you enter a loan arrangement with a financial institution, you're buying credit. After all, you're paying interest (that's the markup) and in return you get to use the money for your enjoyment (that's what you're buying). Most financial institutions believe they "grant" credit — and they do. But from a consumer perspective, if you think about it as "buying" credit, then you're much more likely to apply all the same criteria to the purchase of credit as you would to any purchase:

The first step is understanding the various types of credit available and how you can use them to your advantage.

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