How much Credit is too much

I think the best way to answer this question is by looking at how successful people live. When I was about to graduate college, I spent some time trying to seek out several people in my local community that I considered successful and get their advice.

I eventually found out some patterns to things that financially successful people do compared to the general population. Being raised in a “borrow your way to success” culture, I learned a lot of money principles that changed my thinking. I think many people, especially if you’re in Generation Y, need to look a lot into this topic for the sake of your financial future.

There are a lot of great books out there, with Dave Ramsey’s “The Total Money Makeover” being the one that I found the most useful. The topics he discusses in that book matched up with what I was told by other wealthy people, and I do believe delayed gratification brings a better lifestyle long-term than credit ever can. Here’s why:

1) When you use debt to run your life, it can overtake your life.

I know people that have leveraged themselves so badly in debt that even a small emergency would cause their whole finances to fall apart because they couldn’t make their minimum payments anymore. My husband and I were at that point when we first got married, and you have to be very intense to break out of it. We even sold some things because it was worth our peace of mind just to get some progress. Now we’re able to use our incomes to get out of debt, which we plan to do within the year 2008 and early 2009 (student loans and everything).

2) A debt lifestyle to impress other people never lasts.

There are people who use credit just to buy things to impress their neighbors or other people in their social circle. Long-term, these items wear out and then the whole cycle starts again before the first set of things is paid off. With items that go down in value, if you can’t really afford it, don’t get it until you can.

3) The only debt we was told we should ever have to get by several wealthy people is our first home mortgage.

This is only because it’s hard (but not impossible) to save up for an entire house when you’re starting out, even when you’re living below your means. It’s still a very good idea to at least have 20% saved so you’ll avoid having to pay Private Mortgage Insurance (PMI). If you have the mortgage company do what’s called manual underwriting, you don’t even have to have a FICO score.

4) Every wealthy person I’ve ever met has not owned credit cards in years, if they’ve ever owned them at all. They pay for their cars in cash.

Some people obsess over their FICO score like it’s their child, and I suppose you need to protect it if you plan to be in debt your whole life. However, the one connecting thing between everyone I talked to (which even included one man who had earned a 10-million+ dollar net worth in one generation) was that becoming debt-free was what gave them a foundation to pursue their dream career that made them wealthy.

A lot of credit card companies are becoming reckless when it comes to messing with people’s interest rates and charging fees for anything they possibly can. With car loans, you’re paying interest on something that usually goes down in value (which results in you being “upside down” if you try to sell it later-though it’s still better to borrow the difference if it’s hurting you to stop the cycle.) It’s better in both situations to pay for things upfront and upgrade as you go. I’m finding it’s a lot easier to use cash and a lot less stressful as well.

I believe too much credit is credit that’s enough to take your peace of mind and slows down your ability to financially succeed. For my husband and I personally, our lives have become more prosperous the less we’ve used credit and paid down our existing credit. Other people may give you a different point-of-view, but I feel confident in the people I take advice from.