Pros and cons of having credit

By Benjamin Salisbury

During periods of economic uncertainty, such as the financial crisis of 2008, it can be tempting to reject credit. This is especially true when borrowing criteria for mortgages and credit cards is tightened, as it was after 2008.

In the UK after the second world war, many households were short of cash, and food rationing was common until the late 1950s. Thus, a generation grew up with the mantra "neither a lender nor borrower be". The credit boom of the 1980s opened up a new generation to the convenience and advantages of credit, but for those who grew up before that time, the motto stuck.

But in the modern world is it possible to exist even to the age of 30 without credit, and would you even want to? Or would having no access to credit mean you lose the benefits to your finances that using credit can bring?pros-and-cons-of-credit

Advantages of living credit-free
The biggest advantage to saying no to credit is you are unlikely to have any debt. You also can rest easy knowing whatever money you have is yours. You live within your means.

"If someone does not have to worry about making repayments and dealing with interest being added to their credit balance, it will make their financial life simpler," Laura Rodrigues, senior public policy advocate at StepChange Debt Charity, said in an emailed response to questions.

Additionally, saving for something and buying it outright with no further debt is a good feeling. Debt can lead to stress, anxiety or depression, should it become unmanageable or overwhelming. Never borrowing can help you avoid that. The pressure of meeting an ever-increasing list of repayments doesn't exist if you don't borrow in the first place.

For older generations, this way of approaching money and attitude to finance is more natural because credit was not as readily available as they became adults.

However, while "it is perfectly possible to go through life without credit, most people will need it at some point, such as to buy a home," said Rodrigues.

Advantages to having credit
"Credit can be a very useful tool for dealing with unexpected expenses in a simple and affordable way," Paul Gordon, managing director of credit cards for Lloyds Banking Group, said in an emailed answer to questions.

"Access to credit gives consumers the flexibility to budget, to spread the cost of purchases, in the case of credit cards in particular, to enjoy additional support such as protection from Section 75 of the Consumer Credit Act."

If you use credit wisely, you build up a strong credit history. A good credit profile proves you are responsible when managing money, making you less of a risk in lenders' eyes.

"Building a good credit history can translate to longer term 0% deals on credit cards, which means you have longer to pay for a holiday or other item without incurring interest, to access to mortgages at cheaper rates which can save you thousands of pounds in mortgage interest repayments," Simon Hall, corporate communications director at Virgin Money, said in an emailed answer to questions.

With good credit you will have more borrowing opportunities, Hall said, and access to better rates on loans, credit cards, mobile phone contracts, rental agreements and vehicle finance.

Credit allows you to plan big purchases, such as a new home or vehicle. Credit also allows you to purchase important big-ticket items sooner than if you have to save for them, allowing you to, say, replace a broken refrigerator or make car repairs as quickly as possible.

At the same time, you'll be able to spread the cost of such emergency purchases over the course of several months, rather than having to fork over the cash right away, Hall said.

There's no right or wrong way to be
There are pros and cons to credit. Not having credit keeps life simple, and buying things when you have the money is a good way to manage your finances.

However, in the modern world, virtually everyone needs credit at some point and, managed well, it can make life much more convenient.

"Most people will need credit at some point in their lives, and it can be beneficial as a way to spread the cost of large purchases," Rodrigues said. "But it is also a serious commitment that should never be entered into lightly."

See related: Credit cards no longer just for big-ticket items, Financial capability: Managing money and planning ahead, Emergency credit card a good idea -- if used wisely

Published: 18 November 2016