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I HATE DEBT. A very happy day was when we paid off the mortgage. I’d rather walk on broken glass than pay a penny of interest on my credit cards. But there have been a few exceptions to my usual rule, all involving car purchases.
The first was many years ago when I reached what I thought was an all-cash deal on a new car. The salesman surprised me when he offered the same price with 0% financing. It seemed like a no-lose proposition, and I took him up on it.
Several years later, I was similarly negotiating a cash offer on a new car. The salesman likewise offered the same price with 0% financing. I pressed him to explain how the manufacturer made money on the deal. He shook his head and said it was even crazier than that: He got an extra $200 if he signed me up. I told him I’d do it if he’d split the $200. Deal done.
Finally, a few years ago, I was helping our youngest daughter buy a car. As usual, I was offering a cash deal. The dealership’s finance department offered very low financing, but not 0%, and I declined. The woman there told me I’d be doing my daughter a favor if we took the financing, put the loan in my daughter’s name with me as guarantor, made timely payments for a year and then paid off the balance. The interest cost would be minimal and my daughter would establish a solid credit score. I took the advice and the financing.
I signed my daughter up for a free Credit Karma account and, over the next several years, watched her credit score increase until she achieved the excellent score she enjoys today. Along the way, her score helped with several landlords as she applied for rentals. Recently, just after she and her new hubby closed on their first home, she called to thank me. Her highflying credit score was a key ingredient in snagging a very favorable mortgage rate.
Credit and debt service is the price we pay to afford things we need or want that we couldn’t otherwise pay for in cash. If you own a home, you’ve likely had a mortgage. When you bought your first car, you likely had an auto loan. And, when you are raising children, carrying a balance on your revolving credit card is often necessary.
Debt is a tool that most of us have had to use at some point in our lives and, if we are lucky, we may achieve that golden moment when we have enough money that we can pay off the mortgage, the kids are launched and we are able to buy a new car with cash. For many, however, credit is a constant companion throughout their lives.
I completely agree that there are times when it makes sense to borrow money for a specific purpose when borrowing would not otherwise be necessary. However, that is only an option when you have the economic ability to choose whether or not the benefit of taking on debt is worth the cost of that debt.
I am in your camp. I detest debt. I paid interest on credit cards throughout my 80 year old life, about 3 times. Speaking of debt, I do worry about the $38 trillion or so National Debt. As for Cars, only financed if it made sense for me and I could save money, otherwise I paid cash once. Only financed if I had too. For my mortgage I managed to pay it off early. Been debt free for about 30 years, and that is the way I like it.
Great post Andrew. The last thing I thought of was handing my kids credit cards to build credit. With regards to car purchases, I bought a certified pre-owned Subaru in April. The dealer told me they would take $750 off the price if I financed. I was pressing an all cash deal, but with that incentive I financed the car, paid off the loan the next month, and that was that.
I missed reading your article when you wrote it years ago. I added my youngest son as an authorized user to our credit card over thirty years ago before he was age 10. Fast forward to a few years ago when he and his bride bought their first home. His credit score was up in the excellent range in part because of the length of credit and his high credit score helped them secure excellent fixed rate financing during the period that rates were historically low and seem unlikely to be repeated in the foreseeable future.
Teaching our children about the wise use of credit is a wonderful gift parents can give their children. Thanks for sharing your experiences.
Bill, what a creative tactic to add your son as an authorized user at such a tender age (and very wise that he wasn’t “initially informed!”).
Wish I’d thought of it way back when our kids were young.
Wow! A ten year old with a credit card. He must have had a lot of friends. 🙂
My son was and is an authorized user on the card, although he was not initially informed he had that credit card designation or given the physical card until much later at an age appropriate time. I am happy to say he both has had a lot of friends for decades and that he has not used the card since finishing his college. I am grateful that so much has gone the right direction in the lives of our children. I recognize that my role as dad had and has an important influence in our children’s decisions.
I’ve also taken out a car loan to obtain a better price even though I had been intending to pay cash. The loan was at a good, but not a great interest rate, but I paid the car off entirely in just a couple months so still made money on the deal.
Its an interesting spin on developing a good credit rating for your daughter. Well played.