Introduction
Credit is a great tool that has been around for centuries. Debt is not a new concept. The average person, however, hasn’t discovered how to use credit wisely. It has become an essential part of our modern economy.
If you want to learn how to get out from under bad debt and learn how to properly use debt to build wealth, you are in the right place.
Credit Overview
Did you know that over 2 million Americans have racked up a debt of at least $50,000? There is obviously something wrong with the way people are using credit. This is the reason why I created this series on your new financial plan.
I believe now more than ever, people need to learn all they can about credit. We cannot escape its presence or use. It is absolutely crucial to learn how to use credit properly.
When you do, credit can play a powerful part in helping you to build wealth instead of taking it away from you.
You Were Born To Prosper
I believe we all deserve to be financially prosperous. I also believe that as the word of God states in 3 John 1:2, “Beloved, I wish above all things that thou mayest prosper and be in health, even as thy soul prospereth.”
That we are supposed to be prosperous.
At the same time, we are supposed to prosper mentally and spiritually first before we prosper physically.
Why am I getting all religious on you all? I want to convey a principle that can make the difference between wishing for Financial Freedom and actually achieving it. Before you can make the money you dream of, you have to develop the mindset that will attract and not repel it.
Debt is a tool. Some have made debt however their master. Men and women of all ages are working so hard, in fact, slaving away just to pay their creditors. I can tell you that isn’t the System for Financial Freedom.
Like I said in the beginning of this post, credit is not a new concept. People have been borrowing as far back as people could trust one another.
Credit Vs Debt
One of the first steps in learning how to use credit wisely is to cover is the difference between credit and debt. I’m sure you have seen and heard these words be used interchangeably.
For the most part, they mean the same thing. However, there is a slight difference in the definitions. These terms can make the difference between dealing with credit and debt as an amateur or a savvy Pro.
Credit is defined as the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.
I’m sure you’ve heard debt be defined in the same way as well. Don’t feel bad. We don’t learn this stuff in school. Debt is defined as the amount of money you owe to others, which you must pay back with interest and fees.
So to break it down, credit is the privilege and debt is the obligation. Credit is what you get to borrow. Debt is how much you have already borrowed, which you have to pay back.
A Brief History of Credit
Proper Use Of Credit
In the good old days where every family was its own Mom and Pop Shop, credit was extended to trustworthy people.
Besides, the average family most likely had a trade or business through which to make good on the loan or debt. The farmer, the Shoemaker, the baker, or the butcher would be able to repay the debt through their service.
Credit was a privilege extended to businesses by their vendors. It wasn’t unheard of for the restaurantteur to get a couple of bags of rice on credit, the vendor knowing that they just needed to turn a couple tables to get the cash flow to repay.
This was, essentially, the proper use of credit. We will discuss this in detail a little later.
The Worst Kind Of Debt
Things change drastically since the good old days.
Specifically after World War II, America saw prosperity like never before.
Baby Boomers grew up during the Great Depression. They knew the life that had nothing. Aside from that, they fought through and endured a World War.
Anyone can tell you that coming from nothing and passing through Your Darkest Day will cause you to live life to the fullest. They had pent up cravings for consumer goods and a better life after the war. It was a Utopia of technology and business.
These hopeful vetrans fueled the demand for goods and services. At the same time, they also created the climate for one of the worst types of debt in the entire world, Consumer Debt.
In 1958, Bank of America launched the first consumer credit card in the United States. It was called the Bank Americard. This later became Visa.
Since then, Americans have become slaves to debt, working for decades to pay off their creditors.
To find out more about how you can get away from this trap, check out my post on
Getting back to the real use of credit
Did you know that over 47% of Americans have debt? That means if you take out five friends for fun evening, Three of you will be in debt. If you need help: 10 Smart Strategies to Eliminate Credit Card Debt Faster
My mission is to help you, my beloved reader, not become a statistic or a victim. How do we make this work? We will discuss two things to help you get your financial plan back on track. Specifically, dealing with your debt.
As we discussed earlier, having out of control Debt Rob’s you today of your future wealth building seed money. This is the money that you and I are going to protect.
This is how the wealthy get rich. They pay themselves first and apply money strategically to invest. I don’t mean to get ahead of myself. We will cover investments later on in this series.
Just know that we have to go to war against our emotions, this materialistic culture, the system just to protect this money.
Stabilize Your Finances
What I am trying to say is that you have no business using credit if you do not have the cash to live without credit. So if you have been using credit the wrong way, Let me take a page from the famous Michael Jordan meme, “Stop it! Get some help!”
I’m joking, but seriously, stop using credit this way. It’s not working. You’re already getting some help because you are here. This is where I remind people that
I’m just a random guy online trying to help as many people as I can avoid some of the financial mistakes that I’ve made and I am no longer a financial advisor. Everything I share is for educational purposes only.
If you have any questions relating to any financial decisions you want to make, consult a trained Financial professional.
So what do you do if you have credit card debt? Pay them down. Pay them off, of course! We will work through this together. Keep in mind that your credit usage should be tied to your income.
Don’t use more credit than you have money to pay for. This is obviously easier said than done.
Tips How To Use Credit Wisely
Congratulations! Now that you’ve got your debt back under control, let’s explore how to use credit wisely and strategically. If you still don’t know how to do this, let me share some tips with you to help on this journey of rebuilding your wealth.
Only Buy Assets
Remember that an Asset is something that pays you more than you paid for it. Period! You’re looking for things that appreciate or increase in value over time.
- Antiques
- Houses
- Inventory
- Raw materials
- Even Investments
Think about it before you purchase. “Is this something that will bring me more money than I paid for it?”
Use credit to retain your liquidity
Taking another page out of the book of The Wealthy, I realized credit has another good use. Your credit can help you stay liquid. This means not having all of your money tied up.
If you have $5,000 in your bank account, and you need $4,000 to purchase raw materials. Spending $4,000 of your cash would only leave you with $1,000. This isn’t the best setup for Financial Security. If an emergency comes up you will only have $1,000 to absorb it.
Having the $5,000 in your bank account, you use your credit card to fund the purchase of the raw materials knowing that you will turn it into something that can bring you more than $4,000.
Let’s say, for the sake of this example, you could make $7,000 once all is said and done. the interest you will pay to hold that debt on the card will be minimal based on how long the balance is on the card.
Aside from that, you will retain your full balance of $5,000 cash in your account ready for whatever happens. Didn’t you already have the $5,000 to pay cash directly? This highlights the proper use of credit.
Aim To Be The Right Type of User
We talked at length about credit and debt from the perspective of the user. Let me take this time to show you the game of how to use credit wisely from the standpoint of the credit industry.
They are in business to make money. How they make money is the problem. They have three main classifications for their customers. The users fall into these three categories based on how they use credit.
Revolver
Their favorite kind of customer is called a revolver. These are the customers who leave a balance at the end of the month. Can you guess why they like this customer?
They can make money off of this customer over the long term by charging interest on the balance that remains month after month. Even better. They love a revolver that only pays the minimum payment.
This is their ideal customer. Do not become their ideal customer!
Transactor
There is another kind of user that they do not like as much. The transactor is the type of credit card user who pays for their lifestyle with their credit cards.
“I thought you said that’s not how you’re supposed to use credit?” Take it easy! They do something that makes the companies angry. They pay the entire balance with cash from their bank account before the payment cycle ends.
So they use their credit card simply as a tool to pay for things that they intend on paying for with their own money. What’s the benefit in doing that?
Some credit card companies have Perks. These are special advantages given to the customer as they swipe their card. They include:
- Getting cash back
- Earning points
- Earning frequent flyer miles
- Paying for car rentals
- and other special perks based on the card issuer
So these transactors use their cards for the perks and pay the money before they accrue any interest. Credit card companies do not like them because they take advantage of the perks while preventing interest charges.
The nickname in the industry for these types of uses “Deadbeat Users” Because they won’t allow the company to make money off of them. It almost feels weird for me to say this but this will be the only time I would endorse anyone being a deadbeat.
Hacker
This last class of credit card user is as dangerous to the industry as extreme couponers are to the couponing industry. Credit card hackers only use cards with coveted perks. They are literally targeting specific cards for the benefits they can offer.
Brian Jung is an outspoken Credit card hacker, managing hundreds of cards. he has traveled the world and stayed in the most luxurious places for free because he has found a way to hack his credit card usage.
Conclusion
We made it to the end of this post on debt and how to use credit wisely. You learned that you were destined to prosper.
Now you know that getting your credit in order is all about getting your mindset about credit in order. If you didn’t already create your budget, check out the beginner’s guide to creating a budget blog post, do the work to get accurate numbers and dollars to work with.
Pay down any out of control credit cards. If you’re a revolver, Move on to being a transactor or even a hacker. Do this today, And rescue your wealth building fund so you can start saving tomorrow.
How much credit card debt are you paying off or have you paid off?
