All debt is bad, but can you have too much credit?

I used to be a huge airmiles accumulator. I shopped regularly at sponsors (namely, Safeway, where I bought most of my groceries) and used an airmiles credit card to get even more points. I actually got enough airmiles to buy a KitchenAid mixer. However, when my accumulation rate dwindled and I learned the cash value of airmiles — less than 1%! — I decided to switch to a cash-back credit card. I redeemed my remaining airmiles for Banana Republic gift cards and closed my airmiles Mastercard account.

I thought about keeping the credit card, but what did I need 3 credit cards for? It had the shortest credit history and the lowest limit, so I couldn’t think of any reason to keep the account open. After I closed it, my eyes then turned to my line of credit. Should I close that too? What about all the other kinds of credit I keep?

Types of debt/credit I’ve tried:

Types I haven’t, but could probably get:

  • bank loan
  • payday loan
  • car loan
  • mortgage (I will probably go for the ING un-mortgage)
  • investment loan
  • personal loan from friend or family member (actually I would like personal GIFTS please, you may donate via PayPal. I’m just kidding)

In short, there’s a lot of credit and debt to be had out there.

I received my line of credit from my bank when I was in my second year of university. I used it to fund my braces and some shopping sprees at Sephora. In any case, I don’t need it anymore but I always have that fear that I might need it later — which makes no sense, because every month that passes I become more financially secure but I worry anyway.

Would I use it in an emergency? I don’t think so. I’m not sure what catastrophes are in my future, but I can cope with any immediate crisis costing $2,100 or less using my emergency fund, and if I found myself in need of more, I think I would probably turn to cashing in GICs early or liquidating stocks before I take on any debt.

Would I use it to buy a car? Probably not. I recently received a letter that they’re raising the interest rate on this line of credit  from 6.75% to 8.75% and I feel like I could probably get a better rate on a traditional car loan — especially if I snag one of those “0% for 5 years” rates.

Would I use it to fund a down-payment on a home? No, because the thought of adding a big line-of-credit payment AND a mortgage to my life at the same time makes me think I might have to give up something like, oh I don’t know, buying food.

In short, I don’t need it — but should I keep it? The account is now about 4 years old with perfect payment history. I’ve made somewhat of an effort to keep it alive over this time with various balance transfers, but for the most part it’s a neglected step-child from a previous marriage with Reckless Spending On Consumer Crap.

My concerns with keeping it open are: firstly, being overly exposed to identity theft. I’ve had my credit and debit cards stolen before. Even though the bank acted quickly and painlessly put everything back as it should be, I still wouldn’t categorize it as a particularly fun experience. Furthermore, my credit cards have much lower limits than my line of credit. I really don’t want an identity thief to get a Mini Cooper before I do, especially with my account. Secondly, what if I relapse into Spendy McSpenderson again? Should I really have access to that much money knowing my penchant for luxury goods? Isn’t that like keeping your liquor cabinet stocked even though you’re an alcoholic?

What are your thoughts? Keep the account for the credit history and “just in case”? Or close it to protect myself against identity theft and the opportunity to make bad financial decisions?

why good credit is GOOD

I have a solid credit history. It’s one of my best qualities. I’m so proud of this sometimes I want to divulge it when I go out on dates, like an attribute that makes me a better partner:

“I do yoga, like dogs, love to travel, and have an excellent credit rating. What about you?”

Let’s be real here, if a guy had bad credit I would find that unattractive!

I’ve built this excellent credit over the past few years, and it has served me well. Good credit pays you back. Earlier this week I had to call to set up my account for the electric bill (ever since I moved in I’d been living in fear that the lights might be shut off at any time), which normally requires a $200 deposit — unless you have good credit. A quick credit check got the fee waived for me. Which is really excellent, since I was not in the mood to dip into my emergency fund yet again.

If you don’t have credit, you need to get some. Please don’t be a 20-something whose parents pay all your bills. Not only do you need to take responsibility for your own expenses, you need these expenses to be in your name so you benefit from handling the accounts properly. I always find it terribly sad when I meet a 21 year old with no credit card history because their parents pay their cellphone, car insurance, and electricity in their apartments (ha!). While it might seem nice of mom & dad to pick up the tab, it can hurt you later when you want to have a long credit history to take on a big expense yourself.

In addition to good credit getting fees waived, it can give you even more benefits: like more credit (irony!) and lower interest rates on loans or insurance rates. For example, I know I could go get a car loan at any time. I don’t really want to, but I could. I could also negotiate a fantastic interest rate on it. My good credit rating means I pay my bills on time, and lenders will always appreciate that and be kinder to me because of it. Furthermore, I understand bad credit can be pretty hard to fix. If you’ve got collection agencies after you because you don’t pay your bills on time, it’s going to stay on your record for years even after you smarten up. In short, it’s better to avoid the mess of bad credit entirely.

All that said, I’m with Gail vaz Oxlade when she says credit is only a concern of people who want to borrow — and we shouldn’t be people that borrow, because borrowing = debt. She often argues that credit is the true source of money woes, since its what facilitates a financial downfall in the first place.

It’s true that if you don’t need to take out any loans, it doesn’t matter what you’re credit score is. I wish I could be in that position, but since I intend to purchase a house at some point and probably won’t have $400,000 lying around, I’ll need a mortgage. To get a mortgage, I’ll need good credit. So for the time being, I’m all about protecting my credit score by paying my bills on time and in full, reducing my debt load, and keeping track of accounts (like bank accounts I closed 7 years ago that are now being charged fees!).