Why you always want just a little bit of debt

Let’s be clear: debt sucks. No arguing there. But if you’re living without a credit card, you’re playing with fire.

No credit is seen as the same as bad credit, which means you could be denied if you ever needed to rent an apartment, take out a mortgage, or need a payment plan for anything. The credit system needs records on you—not only do you need a credit card to prove you’re worthy of credit, but you need to use it. As long as you pay off the balance every month, you won’t accumulate any interest and more importantly, you’ll have proof of not having debt—instead of just the absence of debt.

This is what we mean: you always want just a little bit of debt.

Having and using the card shows you are capable of (and actually follow through on) making regular payments. It is proof you have a steady income (even if your income isn’t actually that steady), and it’s proof you can reliably pay for things you purchase—which is what your credit score is all about.

A credit card if your credit tracking device. You use the card to tell someone ‘I will pay for this thing with borrowed money.’ They agree to let you pay with the borrowed money, then you turn to your credit card company and say, ‘thank you for allowing me to borrow your money. I will now pay you back with my money.’ If you repay promptly enough, you can repay the exact amount you borrowed, rather than paying more than you borrowed as interest.

Your credit card company recognises you successfully borrowed their money and returned it—and they share this information with credit tracking companies. Each time you borrow and repay, you gain credibility in credit-tracking terms. If you do this enough times, you become considered a credible borrower, so if you ever need to borrow a large amount of money, companies will look at how well you returned money in the past and decide they can trust you.

You’re right to be wary of credit and credit cards. UK household debt has reached a new high, with households now owing an average of £15,385 to credit card firms, banks and other lenders. Payday loans deserve their reputation for being dodgy and we all know someone struggling with money. If you have addiction issues, credit may not be something you can use safely, but if you can teach yourself to use it in a controlled way, you’ll be better off than if you never have it.

Getting started is easy. Go to the bank you already have an account with and ask to open a credit card. Your first card, especially if you have no credit at all, is going to have a small limit—like £500. The next step is to start spending on it. If you use too much, you’ll look like a wild card (even if you pay it off every month) and if you don’t use it at all, you’re not proving you can be trusted. So go in and spend 5 percent of your limit each month.

Five percent of £500 is £25 so your goal is to use £25 per month—about the same amount as a phone contract payment. Switch your phone contract payment over to your new credit card, and in the same breath, set your bank up to pay the full credit card balance automatically, every month. You won’t have to remember to pay it off or worry about it at all—and you won’t pay any interest. Rinse and repeat for month after month.

After a while, you can ask for a credit limit increase—your bank will pull your credit score, see you’re good at borrowing money and paying it back on time, and will increase your limit. It’s likely you’ll get a big jump. Your limit might now be £2000, and it’s time for new maths. Five percent of £2000 is £100 so now you can add other regular payments to your card: Apple Music or Spotify, Amazon Prime, your electricity bill, your internet bill. Add them on until you reach the new £100 amount, and sit back again. Everything is now automatic—your regular payments go out, and your credit card balance is automatically paid in full every month. You build your credit without really doing anything.

This is why you always want a little bit of debt—you hold the debt for the day, week, fortnight before you pay it off in full without incurring any interest and reap the rewards for when you want a lot of debt in one go (a mortgage or an emergency).

Of course, if you’re the child of a Russian oligarch or heir to the British throne, you might not need credit. You might be in the incredibly fortunate position of not needing to borrow any money to buy the things you want. For the rest of us, building good credit is crucial. If you don’t have any credit score to speak of, you don’t exist in the world of credit.

Having no credit can block any number of decisions you may want to make and the only solution is to start building credit as soon as you can. The longer your credit history, the better your score. ■