We’ve all heard about the dangers of credit cards. We all know someone (or are someone) who has gotten in debt a little too deep because of them.  Most debt counselor’s advice is to simply quit using them or cut them up and pay off the balance. Then when you’re out of debt, and can use credit responsibly, you can have your cards back. But my question is; when is it responsible to use credit? Most financial advisors, both Christian and non-Christian seem to agree that credit is a tool and when used responsibly it can help to increase your net worth. But that doesn’t seem to be working for most people. In fact, I think it’s clear that credit has financially bankrupted more people than it has helped.

I think that one of the major problems is that unlike other tools that we use, most people are not taught how to use credit wisely. Sure parents tell their children to beware the dangers of credit cards and warn them about instant gratification but they never teach them what situations it is ok to use credit in. There are plenty of thumb rules that attempt to answer this questions such as, “only use credit cards in an emergency”, or “credit is only ok to use if you’re buying something that will increase in value”. Unfortunately, these are only thumb rules, and pretty unstable at that. What constitutes an emergency? Does someone have to be at risk of losing a limb or is it ok to use financing if the sale on the TV that you really wanted is going to end soon. And how do you know if what you’re buying is going to increase in value? Over the last year we saw foreclosures across the country and people walking away from their houses because they owed more than the house was worth. Were their mortgages a good use of credit?

We see credit or debt discussed several times in the bible. But what we as Christians often forget, is that there are two sides to credit. There is a borrower, and a lender. Our lifestyles and roles as consumers have trained us to be borrowers without reminding us what a blessing it is to be a lender. I don’t mean to be a lender for profit, the way the banks and credit card companies do. But to be a lender to someone in need. Remember that God told Israel that he would bless them and make them lenders to many nations and borrowers from none (Deuteronomy 15:6). How can we reach out to those in need if everything we own is already owned by someone else? The purpose of credit is not to allow us to purchase what we want or when we want it. For Christians, the purpose of credit is to serve as a way to help others. We should be the lenders, not the borrowers. God desires us trust him for our needs and to be lenders or even givers to others in need (Matt 5:42; 6:31-32).

So, I would say that “yes”, credit is a tool. But not a tool like a hammer with which you may bruise your finger if you make a mistake. But more like a chainsaw, in the sense that if you use it incorrectly you may never recover. The sad part is, most people are holding it on the wrong end and will end up hurting themselves.

Supporting Verses about Debt

Others were saying, “We are mortgaging our fields, our vineyards and our homes to get grain during the famine.” Still others were saying, “We have had to borrow Money to pay the king’s tax on our fields and vineyards… We have to subject our sons and daughters to slavery. Some of our daughters have already been enslaved, but we are powerless, because our fields and our vineyards belong to others.”

- Nehemiah 5:3-5

A man lacking in judgment strikes hands in pledge and puts up security for his neighbor.

-Proverbs 17:18

Give to the one who asks you, and do not turn away from the one who wants to borrow from you.

-Matthew 5:42

Do not be a man who strikes hands in pledge or puts up security for debts;

If you lack the means to pay, your very bed will be snatched from under you.

-Proverbs 22:26-27

The wicked borrow and do not repay, but the righteous give generously;

-Psalms 37:21

The rich rule over the poor, and the borrower is servant to the lender.

-Proverbs 22:7

Let no debt remain outstanding, except the continuing debt to love one another, for he who loves his fellowman has fulfilled the law.

-Romans 13:8

This is an article originally posted at DebtGoal.com that gives a good basic explanation of what factors are taken into account to determine your credit score. This information is important because of how prominent credit scores have become in daily life. Even if you don’t currently have any debt and don’t ever intend to, your credit score can come into question for many other “less financial” reasons. Many employers are starting to require a credit check for new applicants, the U.S. government requires it as part of a security screening, and even many banks  run credit checks before allowing you to open a new account.

Understand Your Credit Score

Credit Basics: How Banks Price Risk

Credit is simple.  The more likely a borrower is to default on a loan, the higher the likelihood that the lender will lose money on that loan, even with the interest fees.  As a result, lenders often refuse to make loans to risky borrowers or charge higher rates because they know that some portion of risky borrowers will default.

Although this sounds unfair, it’s is simply the lending market at work: pricing the default risk as an implicit cost of making the loan.  The difference in cost can be dramatic.  Two people getting a $200,000 loan on the same house might pay very different interest rates based on their credit histories.  A borrower with a high credit score might qualify for an interest rate of 6% while the less creditworthy borrower might qualify for a 7.5% rate.  This difference of 1.5% in interest rates translates into a higher monthly payment of $250 and adds up to over $70,000 in higher interest payments over the life of the loan.  Just think what you could do with that savings!

Getting Your Credit Score

Although you can get a copy of your credit report for free at www.annualcreditreport.com, you will generally have to pay to get your credit score.  You can purchase this at www.myFICO.com.

Credit Scores: Your Credit History in a 3-Digit Number

Before the advent of the credit score, lenders used to carefully review each potential borrower’s credit file for signs that they would faithfully repay the loan.  As lenders grew in size and volumes of transactions, this personal review process became cumbersome and full of variation.  As a result, methods were created for summarizing all the information in your credit file into a single number.

This credit scores provides a standardized way of comparing the risk that a borrower will default on a loan.  The higher your score, the less risk you present of default, so lenders will be willing to lend to you at a lower rate.  Because not all lenders report to all credit bureaus, the three major credit bureaus may report different credit scores.

The first company to popularize the credit score was Fair Isaac, creator of the FICO score.  Since then, other scores have emerged, but the FICO score remains the most popular.  Regardless of the model used, credit scores are generally between 350 at the low end to 850 at the high end.

How Your Credit Score is Determined

FICO scores are determined by assigning varying weights to five important factors:

1. Payment History (35%)
   Borrowers who are current on their accounts generally have lower default risk.  Delinquencies, late payments, collection actions, and bankruptcies have a major negative impact on your score.  The more recent the delinquency is, the larger the negative impact.  The good news is that by paying on time, your credit score can start to improve in as little as 6 months, although bankruptcies will stay on your credit report for 10 years.
2. Outstanding Debt and Credit Line Utilization (30%)
   This factors in your overall debt levels on auto and home loans as well as how close your credit card balances are to the credit limit.  This last factor, your credit line utilization (total credit card balances divided by total credit line), measures how much of your credit you are using.  Fair Isaac has found that borrowers who use a higher percentage of their available credit are a higher risk of default.  Your credit line utilization should ideally be less than 25% and roughly the same on all cards.
3. Length of Credit History (15%)
   A long credit history gives creditors an idea of your payment actions over a period of time. If you have a short credit history less is known about your risk and therefore creditors conservatively rate you as higher risk.
4. New Credit and Credit Inquiries (10%)
   Opening a new account may indicate that you are taking on debt obligations that you won’t be able to manage or that you are desperate and are relying on credit to meet expenses.  Similarly, applying for credit which shows up as a hard inquiry on your credit report, may indicate that you are about to take on more debt than you can handle.  Soft inquiries from pre-approved offers, current lenders evaluating your credit, landlords, or yourself do not count against your score.
5. Types of Credit (10%)
   Having a mix of different types of credit such as credit cards, auto loans, and mortgage show experience managing different types of debt and this mix will positively impact your score.  Certain types of debt like in-store financing are correlated to higher default risk in borrowers and will negatively impact your score.

Improve Your Credit Score

1. Review your credit report and correct errors.  You can request one report from each credit bureau every 12 months at www.annualcreditreport.com.  Review your report for inaccuracies and request a correction from the credit bureau where it appears.  By law, the credit bureau has 30 days to dispute your claim with the lender.  Remember to keep a copy for your records.
2. Improve your payment history by getting current and staying current.
3. Reduce your credit card balances until your credit line utilization is less than 25%
4. Don’t open or apply for new credit.  Both of these will reduce your credit score
5. Don’t close unused accounts.  Although this sounds counter-intuitive, closing an unused or zero-balance credit card will reduce your available credit line and therefore increase your credit line utilization.  Unless this card has an annual fee, leave it open.

Translate Your Higher Score into Lower Rates

After you have made significant progress paying down credit card debt and maintaining a consistent on-time payment history for 6-12 months, your credit score may have improved dramatically.  At this point, you can translate your higher score into lower interest costs.

1. Lower your remaining credit card rates by calling your credit card company and asking for a lower rate.  They will pull your score and, recognizing that you could get lower rates elsewhere, may offer to lower your rate.  Renegotiating with your current card issuer is always preferable to getting a new card, as the new hard inquiry will lower your score.
2. Refinance your mortgage.  If your score has improved significantly, the savings can be substantial.  Do your mortgage shopping within a 2-week window, as the scoring algorithm treats all hard inquiries within a short period of time as a single inquiry if done for the same type of loan.
3. Take advantage of new balance transfer offers if these have become available to you.  Your credit score will take a hit, but the lower interest costs may justify it and it will rebound quickly as you continue to make payments on time and to reduce credit card balances.

Scott Crawford is CEO of DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.