• Credit is useful, but only when it's used responsibly and for the right reasons
  • Too much debt for the wrong reasons can land you in a world of financial trouble with more credit than you can handle
  • Responsible debt can further your financial future instead of holding you back. It can help you study, or it can help you to start a business venture

Credit is often looked down on by those who have never needed it in dire straits. But not all types of credit are bad – sometimes credit can even be useful.

Here's how to assess the reasons you want to apply for credit and what important things to ask yourself before you do.

#1: Credit for Emergencies

Emergencies happen and they can take any size, shape, form, and amount of financial damage. Sometimes the emergency requires a few spare hundred bucks that you don't have around right now, other times the emergency is bigger and might require a personal loan to fix.

Most emergencies aren't good reasons to get yourself into debt, but while they aren't good ones, they can still be valid reasons for taking out a loan.

• Ask Yourself: When it comes to emergency credit, ask yourself why it's necessary to take out a loan for this emergency – and what you can do in the future to save instead for the next emergency to make sure that credit of this sort isn't necessary again.

#2: Credit for Your Financial Future

Are you stuck and want to advance your financial future but lack the funds to do it? Sometimes this can be a valid reason for incurring credit – but only when you are sure that you can pay it back according to plan.

Credit for your financial future can be valid reasons to apply for a loan. Sometimes the goal is starting a business, other times the goal might be a student loan in order to further your studies.

• Ask Yourself: For credit that applies to furthering yourself in some way or another, ask yourself what your six-month to six-year plan is from here. How sure are you that you will be able to pay back the loan? If the answer is “Completely”, go ahead.

#3: Credit for Medical Expenses

The same way as your average emergency, medical expenses aren't a great reason to get yourself into debt – but sometimes it can save your life. Hospitals, medication, and doctor's appointments can be expensive, but they can be crucial to survival.

It's also a good reason to keep your credit score in good standing, just to make sure that you can take out a loan if you were to need one in a life or death situation.

• Ask Yourself: When you've had to take out a loan to cover medical expenses, ask yourself what you will do in the future, and consider alternative financial options (such as a hospital plan) that can offer you help in the future.

#4: Credit for Groceries

Charging groceries to your credit card or taking out a loan for food puts you in one of the worst possible financial situations on this list. It means that you already don't have enough available funds to cover your basics, and taking out a loan to cover this very basic need means that you will almost certainly be in the same situation again in another month.

When you've needed to take out credit for groceries, it's time to think about your financial situation and budget at a glance.

• Ask Yourself: Credit for groceries takes a bad financial situation and makes it worse. It's rarely worth it. Ask yourself how you're going to cover this shortfall in the future, and ask yourself if needing to take this loan is really able to fix your financial situation, or is just a temporary fix.

#5: Credit for Leisure

Sometimes you just want to have a little fun, and many of these times your budget won't allow for it. While it's tempting to take out credit for something like a holiday or tickets to the next big concert, credit for leisure is another one of the worst possible reasons to get into debt.

Whether you're trying to treat someone to a day out or spoil yourself, resorting to credit to do it only means that you don’t have enough money to cover it – and since it’s not an emergency, it’s definitely a bad idea.

Credit for leisure’s sake only makes paying back credit later remind you of how much fun you could have had with the money that now has to go into your loan.

• Ask Yourself: When taking out credit for leisure activities, ask yourself how necessary this loan really is. In most cases, the answer is that it isn't – and that you could achieve much healthier results by just saving up towards your goal instead.

Alex J. Coyne

Alex J. Coyne is a writer, journalist and card player. He's been published in international publications including Moneyweb, CollegeHumor, Funds for Writers, Great Bridge Links, Bridge Canada Magazine and a variety of others