Is Credit A Form Of Security?

January 7, 2009

Can an open credit line really be a form of security? I believe that credit can be one form of security, but not everyone agrees! What do you think?

Let’s take a look at both sides of the argument:

Credit Is NOT a Form of Security:

Anti-credit advocates pretty much believe that credit is evil no matter what, but they do make a few excellent points when it comes to viewing your credit cards as a “backup plan”.

You Should Have An Emergency Fund First - Credit is no replacement for a cushy emergency fund. In every situation it is always going to be better to be able to use your own money in an emergency rather than borrowing money to do it.
You Can Get Into Big Trouble This Way - If you are using credit to compensate for every “emergency” that comes along, it’s an easy, and fast way to get into debt over your head. In other words, if you are using your credit cards to compensate for a lack of savings,(or worse, a lack of income!) then you are going to run into trouble month after month. Your regular budget should compensate for all of life’s smaller emergencies, and your emergency fund should compensate for the larger emergencies like being laid off from work, or a trip to the hospital.
How Will You Pay It Back? - If you didn’t manage your regular income well enough to plan for emergencies, how will you ever pay back that large chunk of unexpected debt? Especially if you lose your job, or you are too sick to work?

Those are all valid arguments as far as I see it. Credit, and credit cards in general can be a huge trap if you haven’t brushed up on your financial basics, or if you struggle with the temptation to charge. Viewing credit cards as an emergency fund will get you into trouble if you have no other recourse.

Credit CAN Be A Form Of Security:

My personal feelings on this issue are that yes, credit is a form of security, but it is only one form. I prefer to look at my money as a series of dams - pools of money and/or credit. In the event of an emergency, I would first tap into my checking account, savings account, then my credit accounts, then my investments, then home equity, and in the event of true meltdown, my retirement accounts.

So, no, I wouldn’t go whipping out the plastic at the first sign of trouble, but to me it is an essential part of the overall plan. It is one way that I ensure I can handle all the problems life throws at me - in an orderly and planned manner.

None of us can see the future, no one really knows what will happen today, much less tomorrow. To me, it makes the most sense to have as many backup plans as I can get my hands on - ready and waiting for me to use them if I need to.

Also, keep in mind that in the event of a true emergency, like being laid off, or sick, many credit card companies offer insurance for this type of thing. Better cards have it automatically, and sub prime cards you usually have to pay a few bucks a month for it.

This insurance usually allows you to freeze your credit card payments for up to six months and protects your credit history in the event that you can’t pay your bills. Everyone who carries a balance on their credit cards needs this insurance, and if you ever think you might need your credit cards in an emergency, it makes sense to carry it as well - even if it costs you a few bucks a month.

If you are not sure whether or not your credit cards offer this benefit you can either break out the fine print that came when you opened your account, or you can give your credit card company a call and ask them about it.

In conclusion, I would say that credit can be an excellent form of security - as can an excellent credit score! If you have the ability to borrow money when you truly need to, then that is a good thing. However, credit, and particularly credit cards should not be the first thing that you lean on in the event of an emergency.

The truth is, if there is a true emergency going on, the last thing you want to worry about is how in the heck you are going to pay for it. Be nice to yourself - give yourself some options, not just credit! Money in an emergency fund, a bank account not hovering at zero, and as many methods of payment as you can think of. Plan these things out now so that in an emergency you are equipped to handle anything - because the money is the last thing you are going to want to focus on!

What do you think about using your credit cards in an emergency? Is it the right thing to do? Leave a comment below!

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