Hey, I was wondering if someone needs credit to buy things. People in my family have said I wouldn’t be able to buy a car or a house without credit. But if I’m saving up cash to pay for things outright, do I really need credit?
Note: I’m sorry if this is the wrong place to ask.
You don’t absolutely need credit, no. But it’s sometimes more efficient (financially) to buy things on credit.
Housing is a typical example of this. To save up for the full price of a house will likely take someone years (at least 10, likely more). In that time, you’re (probably) paying rent and not accumulating any net worth for doing so. In contrast if you buy a house on credit (mortgage) you may be paying almost the same amount in mortgage & insurance as you would for an equivalent rent; but at the end of the ~10 years you’ll finish the loan and have a paid off house. If instead you spent all that money on rent, you’d have only the amount saved in addition to the rent paid.
There’s many online rent or mortgage calculators to show when it’s a financial benefit to hold a property on mortgage as opposed to rent & save any difference… it is not always the case that owning your housing is more financially efficient; but for many people it is.
Similar with a car; if you need a car for your income (e.g. your commute isn’t feasible nor reliable via other transportation means); you can’t save up for a car with income you require a car to earn. Of course, this is why many advocate for better transit options and to move away from car-centric cities and lifestyles. But not everyone is able to achieve a car-free life (especially in much of the US).
The other big reason to use credit: you often get real benefits for doing so! Paying in cash occasionally offers a discount; but that’s only the case at a minority of places. In most cases you can pay the same price with either credit or cash, but also receive some benefit from the credit company (e.g. miles, points, cash-back, etc… your card options will vary). Why is this the case? The current state (in the US) is that credit card companies make money on transaction fees to merchants. In order for one card company to encourage you to use their card over a competitor’s they offer some form of incentive. The merchant’s transaction fee is why you’ll sometimes see merchants offer a cash discount; and if that’s the case you’re often better off paying cash. But when price is the same for credit or cash, you’re leaving money on the table by choosing cash (or rather, you’re giving some percentage of your purchase to the merchant instead of splitting it with the credit card vendor).
Your points are good, but you’ve overstated the equity building of a mortgage. You aren’t likely to find a 10yr mortgage that is the same as rent. In a more typical situation, after 10 years on a 30 year mortgage you’ll have 20% equity. Or after 10 years with a 15yr mortgage you’ll have 65% equity.
One of the biggest advantages of mortgages, at least in the US, is in getting a fixed rate. Rents can easily double in the time before you finish paying off a mortgage, but a fixed rate mortgage wont go up. Property tax and insurance can go up, but those costs would be rolled into rent anyway.
Fair point; I was throwing around off-the-cuff numbers. You’re right that 15 or 30 year mortgages are the time frames to calculate around.
The inflation adjustment is valid too. If rates drop refinance options are available at the mortgage holder’s convenience (assuming their terms allow it, but most do); but taking advantage of decreasing rent often requires a move; not nearly as easy as a purely paperwork based refinance.
My mindset is still stuck in the 2010s; when inflation was mild & rates were at historic lows for nearly the entire decade.