Many of us have been conditioned to think that living debt free is the only way to be. While there is some truth in this statement, if you’re completely debt free and using only cash, you’re hurting your chances of getting a new home, and you may end up in a situation that requires more money than you have without any recourse. Let’s find out why paying with cash is not always the smartest idea.
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- It hurts your credit rating.
You wouldn’t think this would be the case, but you do need to have some debt if you want to build up a credit rating. In some cases, people with absolutely no debt have a credit score in the mid 600’s, while those with two or three cards that they constantly pay on will have a score in the high 700’s. What’s the difference? In order to keep your credit rating high, you are going to need to have a little debt.
We’re not saying go run up ten cards and hope for the best. What we are saying is that having one or two cards with low balances is a great way to keep your credit score high. You’ll be getting the benefit of monthly reports on your credit history and you’ll be building that score up to the point where no one will be able to turn you down for anything.
- Emergencies happen.
No matter how proud you are of being able to pay cash for everything – what would happen if you woke up tomorrow and discovered that you have a serious brain tumor that needs to be removed right away. The cost of the surgery is more than $300k and you don’t have any insurance. You’ve been paying with cash for years and your credit rating has suffered as a result.
In this situation, you may not be able to get a loan to cover your health costs and while some hospitals will work out a payment plan, they’re going to use your credit score to determine their risks. The problem with emergencies is that you never know when they will happen and they usually cost an arm and a leg. If you don’t have a savings account that is sizeable, you are literally one step away from financial disaster.
- You won’t be making any extra money.
You know the old saying, it takes money to make money? If you’d like to get some extra income every month, you need to find a way to take advantage of opportunities for multiple streams of income, such as investments. Debt leveraging is one of the best ways to accomplish this since you won’t be using your primary funds for the new opportunity.
While debt has a bad reputation, there are good forms that are necessary if you want to make more money and have good credit. There is such a thing as good debt and if you manage your finances properly, there is no danger in having a little debt.
