Debitum in Latin is what gives us the English word for debt. Depending on your level of financial literacy, this word can be viewed as eternally evil. In the Middle English system of law there were even debtor’s prisons where you could be tossed into jail for the amount of money you owed. So when it comes to our modern sense of the word debt, we may not be in prison because we owe 15,000 on our credit card (or maybe not, if you check out my previous article about paying your credit card monthly), but many times we feel like we’re financially buried under the weight of our bills.
So what could be the pros and cons of using cash? What could be the pros and cons of using credit? Please understand these are all cursory observations. Any decisions about the use of credit needs the consultation of a qualified accountant regarding the laws in your country.
It all boils down to context. As economic systems became more complex, those who held a mortgage wanted to encourage more and more people to qualify for a mortgage. Originally, mortgages were contracts made out to peasants on the “Royal Estate” where it was in doubt they would be able to pay it all off. Therefore the French legal term became “death pledge” (Mort in Latin for “death”. Gage in Latin for “pledge” or “debt”). In fact we even get our word “Real Estate” from this piece of history about contract law. But with a growing population around civilization and more and more goods being bought and sold, this idea left the agrarian model. The peasant worked the land and took earned all their money by paying a portion of their crops to the landowner. In fact very little cash would have been exchanged. As time went on, people left the land and currency became the mode of exchange, but the ideas of mortgages and landowners stayed intact. Seeing the advantages of having people paying on a “death pledge” both for profits and taxation, governments have since offered incentives to people who seek to sign a mortgage and own a house.
So is credit good or bad? In this case it depends on the level of incentive from your government. The U.S. government offers a tax credit for the mortgage interest you spend. They have wrapped it into their income-tax system. Income becomes so integrated that when a person goes to refinance their home, they will find a problem if they own a house worth half a million dollars if they cannot show proof of income (perhaps they lost their job). Credit in this case can be good, since it generates cash flow from your tax return.
The second place credit can help is if you travel extensively for credit. This doesn’t have to do with the amount of money you have. In all cases, consumer credit is like drinking alcohol. You have to use responsibly so it doesn’t ruin your chances at other opportunities. The travel system is built to accommodate credit cards. Many car rental business will lock cash out of your account for a fixed amount of time. This allows them to freeze significant amounts of cash. If you have that in reserve, then maybe it is OK. Past that, the world economy allows a VISA card to make the exchange rates to foreign currency for you. If you are disciplined in paying off your card and enjoy collecting the bonus points in the various programs, all of these benefits can make a credit card the better choice.
Outside of those distinct arenas, however, almost all money management gurus, hands down ask you to repeat the mantra, “Live within your means.” That means that if you don’t have cash to make the purchase, then you need to consider waiting, or another alternative until you can save up the cash.
What do you prefer? Using credit or cash?