Credit Where Credit is Due

Prices are on the move. The May Consumer Price Index (CPI) soared 5 percent from a year ago, the fastest annual pace since 2008. Core CPI, which strips out volatile food and energy prices, surged 3.8 percent, a 28-year high. While the sectors that were hardest hit by the pandemic (used cars, car rentals, airfares, hotel room rates) led the way, there were also increases in other areas, like furniture and household items.

As economist Joel Naroff noted, the data show “what happens when demand suddenly surges while supply fails to keep up.” With prices rising broadly as the economy opens up and more people returning to work, there is likely to be an increase in Americans’ appetite to resume their borrowing ways. Lest you think this is going to be a screed about the perils of doing so, read on!

While debt run amok can be dangerous, using credit to your advantage is a smart way to manage your personal life. In fact, the idea of making purchases “on credit” goes back to as early as the 19th century. It took a while for credit to catch on: according to government data, in 1970, just 16 percent of U.S. families reported having at least one credit card or charge card. By 1983, that percentage soared to 43 percent, by 1989, it was at 56 percent, and today, it's an astonishing 79 percent.

For the 21 percent who do not have a credit card, the issue may not be a lack of desire to borrow, but an inability to qualify. A 2019 Bureau of Consumer Financial Protection report found that more than one in five U.S. adults don’t have the all-important credit score, on which financial institutions determine whether to lend, either because they have not established enough credit or the credit that they have established is too old or stale to be reliable.

That may be about to change. To help those who are financially responsible, but who have been shut out of the credit system, some of the nation’s major banks have come together as part of a government-backed plan to cast the net wider to help more people establish credit records and to take advantage of still low interest rates.

Perhaps this is the moment when you think: “Wait, isn’t this how we got into trouble in the financial crisis of 2008 and the Great Recession of 2009?” While some of the excesses of that era are still with us, shunning credit is not the answer.

While it may seem counter-intuitive, it is important to establish a credit record, because chances are, you will need to borrow money at some point in the future, maybe for a car or to buy a home. Those who have solid credit histories and demonstrate that they can pay their bills on time, usually end up with higher credit scores and as a result, will often get the cheapest interest rates when they borrow.

Of course, before you sign on the dotted line for any loan or credit card agreement, you should know the payment rules, the fees, and interest rates that you will incur, especially if your financial life turns south. Remember, the most important factor in any credit score is paying your bills on time, so do not be late! Best way to manage your payments is to establish automatic payments through your bank.

One more warning: as Americans are revving up their engines and are ready to spend (44 percent of adults say they are willing to take on debt for discretionary purchases in the second half of 2021, according to a creditcards.com poll), I have to channel my inner buzzkill and remind you that credit card interest rates average almost 16 percent, that’s a pretty expensive way to finance your post-pandemic splurge!