The use of credit for investing has been one of the big contributors to the prosperity of the United States during the turn of the 20th century. We see it all over middle Georgia. It was also the main cause of the great depression of 1929 and a major contributor to our depression in 2008 (Note: The US has shown an economic downturn roughly every 40 years, anyway.). The use of leveraging someone else’s money or extending credit to invest has created most of the wealth you see today. Investing without credit means that you must use all of your own money to complete a transaction. That can take days or even years, depending on how big the transaction is (On the other hand, inflation might not have climbed so fast, either). Now, credit cards and debit cards have taken credit to a whole new level. Let’s look at how credit cards are being used and how they should be used.
Most people buy items on a credit card that they don’t have the money to buy “quite yet,” so they walk into a payment commitment with a relatively high interest rate. They add the payment amount to the monthly budget and hope there is enough to cover it. A $400 shopping trip for school clothes, a computer, groceries, or to entertain clients, turns into an $800 expense for you at $65 a month. Was it worth it? It happens every day. It’s called spending without a plan. There is a better way.
Believe it or not, a credit card payment is just like any other loan contract, except it’s unsecured. If you don’t have the money to buy an item outright, the best bet is not to buy it at all. Here are some rules to go by.
Credit cards extend money for purchases for a period and then you pay them back, either all at once or on a payment plan. A good rule is if you don’t know how you are going to pay the money back, don’t buy it. In my opinion, credit cards should only be used for emergencies or as an investing tool. In this case, investing means making your wealth grow by increasing in value over time or cutting outgoing expenses. If I have a car loan at 12% and a credit card at 9% APR, that car loan is going to my credit card. I just saved 3%.
A good way to control a credit card is treat it like your debit card. If anything goes on the credit card, write it down in the checking account registry. This way your money does not get committed to two places at once. At the end of the month, you know you have the money to pay off the credit card statement in full sitting in the account. If you need to make a purchase that you know you don’t have the money for, take a day to plan how fast the purchase can be paid off. That way, it gives you time to make sure you really need the item you’re buying and it keeps your finances in the front of your mind. You don’t want to over-extend your money to three or four purchases that leaves you penniless at the end of the month or worse, STILL OWING. If you can’t pay off the statement balance, don’t buy anything new until you do.
Now for the tricks no one told you about. When a credit card purchase is made, you have 28 days or so (depending on the card company) to pay back the money you borrowed for the purchase, INTEREST FREE. Yes, if you pay off the statement balance at the end of each month, the use of their money is free. The balance that gets rolled over to the next month’s statement is what they charge interest on. If you pay the statement balance off each month, you’ll never be charged interest and it will help build your credit score. There are some warnings. Some companies will charge maintenance fees, watch out for them, AND, if you pay off your balance every month (I found out the hard way), some companies will try to move up your payment due date to get that interest, so pay attention.
Now for the bonus trick. If you read my article on “Lines of Credit,” here is a bonus trick to help with that. I told you the longer you leave your money (income) in the LOC, the more interest gets canceled, right? You’re using someone else’s money for a lower “effective” interest rate. Now, pay the household bills with the credit card while you leave your income in the LOC all month long and then pay off the credit card at the end of the month with one payment from the LOC.
Use of the credit card stays interest free and it cancels a lot more interest on the “Line Of Credit”. Plus you earn more cash back rewards on the credit card (if your card is on that program).
If the balance of the LOC is not going down each month, check your numbers. You’re spending too much.
At least make sure to keep your credit card in check. They are good tools, but can get you in trouble in a hurry.
Happy investing.
