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Is Having No Debt a Smart Move?


on 7/20/2022

Girl smiling and holding credit card

Debt is something everyone should do their best to avoid. It’s been a wild ride for everyone, but younger Millennials and older Gen Z have been hit especially hard. As a result, debt has earned the reputation of being something to avoid at all costs. But it may not be as simple as that.

The Consequences of No Debt

Being debt-free is a goal that tops the list of financial milestones most dream of achieving. While you don’t want to be strapped down with loans, not having any debt can also hurt you.

Our society runs on credit and loans. Everything from renting an apartment to buying a mobile phone can revolve around your credit score. Without credit or loans, you can’t build your credit score, and without a credit score, your chances of one day buying a home or even your first car are limited.

The trick is to find a balance – build your credit score with loans, but don’t let debt take over.

A Simple Strategy to Build Credit

Your credit score is a snapshot of your credit report and overall ability to manage your finances. It is most commonly used when applying for loans, but your credit score can also impact other areas of your life.

An excellent credit score can result in waiving fees on utility deposits, earning discounts on car insurance, and helping you rent an apartment. Some employers will even check your credit. Building your credit without taking on debt isn’t that difficult. In fact, it can be pretty easy. All you need to start is a credit card.

Use the following strategy to start building your credit history with only a credit card:

  • Get the lowest rate possible. Stick with the lowest rate credit card you can find from an institution you trust.

  •  Request a lower limit. Since your goal is to build credit and not boost your spending power, request a card with a lower limit, such as $250 or $500, to start.

  •  Make small purchases. You want to make small purchases throughout the month that you can repay immediately. Then repay the balance in full before your due date.

  •  Set up auto payments. Enrolling in automatic payments will ensure you never miss a due date and that your balance is repaid in full monthly.

How this Strategy Boosts Your Credit Score

Five categories of money management determine your credit score. Using the strategy above, you can see how it’s designed to help you improve each area without accumulating significant debt.

  • Payment history: This is how often you make payments on time.

  • Types of debt: You want a mix of debt – secured and unsecured.

  • Length of credit history: How long you’ve had your credit accounts.

  • Amount owed: The amount of debt you currently have outstanding.

  • New credit: How often you apply for new credit.

Takeaway

While you may have witnessed the consequences of having too much debt, not all debt is bad. Using a low-rate, low-limit credit card is a great way to build your credit history. Making small purchases that you can quickly repay will create smart money habits while boosting your credit score.

We’re Here to Help!

An excellent credit score will benefit you in many areas of your life. If you’re interested in obtaining your first credit card or want information on rebuilding your credit, we’re here to help. Stop by any of our convenient branch locations to get started today.
 

© Genisys Credit Union and www.genisyscu.org, 2022. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to Genisys Credit Union and www.genisyscu.org with appropriate and specific direction to the original content.

 

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