Mortgage 101: Do the opposite of what your parents told you … with debt

It’s a mathematical fact that parents know what’s best for their children 99.8 percent of the time. I’ve finally figured that out by being a parent to my wonderful monsters … err children. Obviously, I’m joking about parenting being some sort of an absolute science, and being a parent is hardly mathematically equitable, right? I mean, how many times does a parent need to tell a child to put their shoes on?

In general, parents know what’s best primarily because we’ve all lived and learned. Our job is to try to steer our children down the path where they avoid making significant mistakes, and decisions involving planning for financial success are at the root of many parental teaching moments. Part of having financial success includes managing debt. Many parents, especially from older generations, believed and subsequently taught us that carrying debt was a bad idea. Using credit cards was even a worse idea.

Kids naturally want to rebel, right? Well, now’s your chance. It’s actually not the smartest idea to avoid using credit cards or to carry debt. As long as it’s managed correctly, it’s better to do the opposite of what parents have always told you. Here’s why …

The use of credit cards
Open some and use them, but be smart in the ones you pick. You should have about one to two credit card accounts for everyday use, though I suggest avoiding store-specific credit cards unless they’re for a very large purchase such as furniture where you get a same-as-cash offer. Clothing and fuel cards should be avoided as well. The associated discounts and rewards aren’t substantial enough to own an additional card that can only be used as those stores.

Using cards allows you to show the credit bureaus you have the intelligence and ability to utilize credit. This means borrowing for a short period of time (a 30-day billing cycle) and repaying most of the balance borrowed. You might be wondering if you read that correctly. Yes, I said repay most of the full balance borrowed, not all of it.

Keeping a tiny balance month-to-month shows the credit bureaus you are utilizing and managing credit debt and improves your score more quickly than if you pay the entire balance off. My suggestion is to leave $10 a month as a carrying balance. As long as you have an average interest rate, the interest charged to you should be about $.89 per month. Consider it a necessary expense to invest about $11 a year in exchange for building a better credit score. A better credit score will save you way more than $11 per year in interest for things like a mortgage or auto loans in the future, so it’s definitely worth it.

Financing instead of paying cash
Not many people have the financial ability to pay a large sum of money for something like a car or house without it putting a significant dent in their savings. If someone has $75,000 sitting in a checking account and wants to pay $18,000 for a car – of course it’s a no-brainer- pay cash. However, if that isn’t your situation, finance it. Finance rates are very low historically and by preserving cash, you increase your opportunity to make more through investments than the interest you’re paying for the car you purchased.

Depleting an asset account (where you could otherwise invest that money and earn 5 or more percent) in order to make a large purchase for a car or home just to avoid paying 2 to 4.5 percent doesn’t make sense. Of course, investing involves risk and includes some volatility, so this approach should still be thought through, however.

Additionally, financing these large items provides you another opportunity to utilize and manage credit debt. Installment accounts are scored differently by the bureaus than credit card accounts, but it’s important to have a good balance of both. Meaning, it’s good to have a couple of each type. The key word there is a couple.

Building and maintaining a good credit structure will protect and enhance your score, the first thing that gets looked at when structuring a loan. Lower scores normally lead to higher interest rates, and higher scores lead to lower interest rates. Now there’s a mathematical fact your parents can’t even argue.

Feel free to ask questions or learn more information by calling Mike or his team at Fountain Mortgage. He can be reached at 913.745.7000 or by email at mmiles@fountainmortgage.com.

This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.

Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268