Is credit needed?

Many people get into trouble with credit because they are desperate to establish credit and because it is easy for them to qualify for more credit than they can manage. The first thing Larry recommends is for people to do without credit as long as they can. The less credit they have, the less credit they will be tempted to use. He also discourages the use of credit for any consumer items, such as entertainment, clothes, or repairs. Those things usually become obsolete long before the debts are paid. ¹

In his book, Debt-Free Living, Larry says that the best way to establish credit initially is to borrow against an acceptable asset. For example, if a person has $1,000 in a savings account and wants to borrow the same amount, most banks will lend the account holder $1,000, using the savings as collateral. Usually, the lender will charge from 1 to 2 percent more for the loan than the prevailing savings rate. So, in essence, it costs about 2 percent interest to establish a good credit history. For a one-year loan of $1,000, the net cost would be approximately $20.

Then, by using the bank as a credit reference, they almost always can qualify for a major credit card, although the credit limit would normally be the minimum amount. This is not to imply that everyone should get a credit card or that everyone will be able to manage one properly. But rather that credit is relatively simple to establish once the discipline of savings has been acquired. ²

Applying for credit

Because credit is accompanied by responsibilities and rights, people should always know those responsibilities and rights before they apply for credit. The Equal Credit Opportunity Act (ECOA) ensures that all consumers are given an equal chance to obtain credit. ³ Before making application for a credit card, Larry recommends shopping around and comparing the interest rates, annual fees, and services of different credit card companies. Be aware of finance charges, expected monthly payments, and types of accounts or uses the card is limited to. Check to be sure there will be no hidden charges that can be applied to the bill. It is also advisable to get a credit card that is widely accepted. However, before committing, read all of the credit application contract and read it carefully. ⁴

Creditors are required to state the cost of borrowing in common language so that the customer can figure out exactly what the charges for borrowing will be. So, since credit costs vary, they need to remember two terms when comparing credit prices from different sources. Under the Truth in Lending law, the creditor must tell in writing the finance charge and the annual percentage rate. The finance charge is the total dollar amount that will have to be paid to the creditor to use the credit card. It includes interest costs and sometimes other costs, such as service charges and some credit related premiums or appraisal fees. The annual percentage rate (APR) is the percentage cost (or relative cost) of credit on a yearly basis. These are the two keys to comparing credit card cost, regardless of the amount of credit or the allowable payback time offered by the creditor.

Using credit cards wisely

Larry believes that there are three principal rules regarding the use of credit cards:

• Never use a credit card to buy anything that is not budgeted.
  
• Pay the entire credit card bill each month.
  
• The first month the entire credit card bill cannot be paid, destroy the cards. ⁵

Reestablishing credit

The difficulty people encounter when they attempt to reestablish credit reinforces an important truth taught in Proverbs 22:1: “A good name is to be more desired than great wealth, favor is better than silver and gold.” It takes a long time to build up a good reputation but very little time to destroy it. Although God is faithful to forgive, this does not mean that the consequences of violating His principles of finance can be avoided. There is no quick fix to damaged credit. The best way to reestablish credit is through the disciplined use over a long period of time of whatever credit is remaining. In addition, if all past debts have been repaid, then each creditor should be personally contacted and asked to review the credit rating they have given to the credit bureau.

Another option that could be helpful in reestablishing credit is to obtain a secured credit card. A secured card is a bank credit card that is established by depositing money in a bank account. The account serves as security for the card; if the bill is not paid, the money in the account may be used to cover that debt. ⁶

Conclusion

The first myth about credit is that you must have it. ⁷ You do not. Larry believes that a person should not establish credit unless he or she has a specific purpose for it and knows how to use it wisely. Lenders promote the idea that a person should establish credit early. But the longer you can go without credit, the less you will depend on it later.

¹ Larry Burkett, Answers to Your Questions About Debt and Credit, Christian Financial Concepts, 1999, p. 5

² Larry Burkett, Debt-Free Living, Moody Press, 1989, pp. 154-155.

³ www.freeadvice.com/gov_material/ftc-equal-credit-opportunity-3-98.htm (Link no longer valid)

⁴ www.flabar.org/newflabar/consumerservices/General/CallALaw/CAL1122.html

⁵ Larry Burkett, Debt-Free Living, Moody Press, 1989, pp. 154-155.

⁶ www.bankrate.com/brm/news/cc/19980213.asp