When is it ok to carry a balance on your credit cards or use consumer loans?
Inquiring minds want to know. I donâ€™t carry any credit card balances, but have been keeping a fairly large HELOC (i.e. Home Equity Line Of Credit) mostly as â€œdry powderâ€ to be used in case of emergency or in case an investment opportunity requires having ready cash at hand. Itâ€™s partially drawn because we also use it to fund cash flow swings for a family business. The interest rate equates to the Prime Rate, which is 3.25% right now and the portion of the interest applicable to the business is deductible as a business expense. I figure weâ€™d have to pay considerably more interest on a commercial loan, and would have to provide personal guaranties on a commercial loan anyhow. So the HELOC makes for a very cost-effective way to fund the business. In terms of the hazards of borrowing against property (i.e. you could lose your home or property if you default), our loan to value (including the 1st mortgage) would be less than 30%, even if the HELOC were fully drawn, so I believe weâ€™re being prudent.
We have not used the HELOC for personal consumer purchases like cars, boats, etc., because, as a matter of policy, we donâ€™t use debt for living expenses or personal purchases. We donâ€™t carry credit card balances or other consumer debt of any kind, and maintain over 18 months of living expenses in cash in an â€œemergency accountâ€.
Does that sound a wee bit paranoid to you? Well, in my early adulthood, I endured a sudden and unexpected period of unemployment, which also happened to coincide with large credit card balances on top of a crushing amount of student loans (can you say levered to the hilt and living way beyond your means by age 25â€¦.). It was a tough lesson on the temptations of debt and the powerful forces compelling us to spend ourselves into oblivion. And it also drove home the need to be prepared for the unexpected â€“ I realized then and there that there really was no such thing as job security and there never would be in my future.
Well, I eventually got back on my feet, and paid off all of my credit cards and student loans in full â€“ a point of pride. It wasnâ€™t easy, sometimes it was quite painful, and it took a few years, but lesson learned, and fortunately learned early enough, well before my peak earning years, that I could recover strongly from it.
So, to the question at hand, here are some things I regret having carried credit card balances or loans for:
- Stupidly large bar tabs resulting only from 25 year old me needing to act like a big shot, booze it up, and buy everybody drinks.
- Costly dinners and recreation, partaken because thatâ€™s just what young urban professionals do in NYC when theyâ€™re young and it seems as if tomorrow will never come.
- Expensive toys, clothing and other status markers in order to feel more confidant (i.e. less insecure) and keep up with the Jones. Had to hock the home entertainment system, the Rolex, etc. to pay the bills. In my older age, Iâ€™ve become decidedly more downscale.
And here are some things I do not regret for one second having borrowed to finance:
- The best college education money (i.e. scholarships and loans, lots of loans) can buy.
- An engagement ring; and subsequently, a honeymoon. Happy wife = happy life.
- Christmas gifts for family (within reason); In my early adult years, I always received far more than Iâ€™d given; It would have been wrong of me to show up empty-handed.
- A sizable loan to my mom (the funds for which I in turn had to borrow from a bank) to help her buy into a higher early retirement benefit.
- My first real vacation as an adult â€“ wife and I still talk about it. It was a formative and bonding experience.
- Start-up capital for our first business venture. Basically, an act of [informed] faith. Fully repaid from business cash flow in 2 years just as the projections had shown.
- First real estate purchase. Most people need a mortgage to buy that first home. Having toured over 100 properties we knew the market inside and out, and tripled our equity the moment the ink on the contract was dry.
How about you? What does your list of debt regrets vs. no-regrets look like?