The proper use of credit can be incredibly helpful in today's world. The abuse of credit, however, can be a major source of unhappiness.
Your grandparents may only have used credit to purchase a home. In 2021 there are five scenarios where a Canadian ought to use credit. If a potential purchase cannot fit within one of thee five categories then a prudent individual would defer the purchase and save the funds for the ultimate purchase of this good or service.
The purpose of this Article is to identify those five scenarios where a Canadian ought to use credit. You will notice that I will be drawing a distinction between the use of credit with respect to making investments and the use of credit when it comes to acquiring an asset.
1. Buying a home
For many Canadians their home is their most significant asset or investment. Few Canadians pay cash to acquire a home today. I recommend that Canadians use credit to buy a home.
I do not suggest, however, that Canadians overextend themselves and pay more for a home than they can reasonably afford. Some Canadian couples find themselves in a debt trap when they buy more house than they can reasonably afford. These individuals run the risk of losing their equity in their home.
2. Buying a car
Purchasing or financing a car is not an investment. An automobile is an asset that depreciates very quickly. Owning a car is an expense that enables the owner to travel from point A to point B. The $64,000 question is how dumb are you going to be with respect to acquiring this asset?
When it comes to cars, it is important to make the distinction between wants and needs. The majority of Canadian adults would like to drive a nice car. This does not mean they need it. Some individuals simply cannot afford to own or lease a car given all the associated costs including financing, gas, insurance, repairs, parking, et cetera. They might be better off taking public transit, car pooling, riding a bicycle, or taking a taxi from time to time.
For those Canadians who need a car it is important not to spend more than absolutely necessary. Anyone who purchases a car to impress their neighbours or co-workers is wasting money that could be better spent elsewhere.
My roommate from university is a lawyer. He drives a 21 year-old car because he is very knowledgeable about cars and he knows which ones are a great value. He understands that a car should be considered transportation and not a status symbol.
3. Financing Education or Skills Upgrading
A university degree, community collection diploma, or a skilled trade, is an investment in a person's career that, ideally, should result in a significant increase in the individual's lifetime earnings. A person who takes advantage of a post-secondary education or learns a trade should be able to earn significantly more money over their career than someone with a Grade 12 diploma.
Having said this there are plenty of examples of high school dropouts who went on to become incredibly successful. Vidal Sassoon, David Karp, Dave Thomas, Richard Branson, Walt Disney, and Albert Einstein are just a few of the individuals who enjoyed tremendous career success despite the fact that they were high school dropouts.
In today's modern world, it is common for individuals to change employers and careers several times throughout their life. That initial post-secondary education or skills training may serve to be a major asset throughout their career.
4. Emergencies
A credit card or a line of credit can be a life-saver during an emergency or an unexpected expense.
It is important, however, to make a distinction between emergencies arising to those who properly maintain their possessions and those who are poor stewards of their property.
If a Canadian makes an effort to obtain regular maintenance on their major possessions--such as their home and their car--then the probability of having emergency expenses is significantly reduced.
When a Canadian uses a credit card, line of credit, personal loan, to pay for emergencies or unexpected expenses eliminating this indebtedness should be a priority.
5. Convenient Method of Facilitating Consumer Transactions
In 2021 it is difficult, if not impossible to enter into consumer transactions without a credit card. Try and book an airline ticket, rent a car, or book a hotel room without a credit card.
For those individuals who have terrible credit they have the option of getting a secured credit card which has all of the advantages of a credit card except the card holder has to pre-pay amounts onto the card in advance of any purchases.
Individuals using a credit card to acquire goods and services should pay off their credit card balances at the end of each month. Credit card companies lose money on those credit card holders who pay off their balances in full each month. In contrast, credit card companies make significant profits on that group of cardholders who do not pay their balances at the end of each month because of the interest that these cardholders pay.
This short YouTube video summarizes some of the points made in this Article.
In this short YouTube video former collection agency lawyer Mark Silverthorn describes the five scenarios where a Canadian ought to use credit.
I appreciate the opportunity to share my insights--gained over three decades in the debt collection and debt relief industries--with Canadians struggling with debt.
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