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Credit Lesson
Good debt is a very important part of your financial plan. Credit can be dangerous so in this lesson we will learn about the different types of loans you can get and how to properly use those loans. Many people believe borrowing money is bad but the truth is what’s most important is how you use the borrowed money. If you use the money to pay for items that go down in value (depreciate) then it is bad. However, if you use the money to buy assets that appreciate in value you can increase you profits with credit.
Most people think of credit cards (cc) when they think of borrowing. The cc is very common in most households and is generally used to purchase depreciable items. This really is the worst use of credit because you end up paying a premium for the items because if you don’t pay the balance on the cc at the end of the month you will have to pay interest on the money that you have borrowed. You really have to be careful with credit card because there are so many gimmicks out there to take your money. A lot of the companies will offer a no or very low interest rate for the first six months or year to get you to switch to them. In the fine print they tell you if you are late with a payment one time during that time period they will charge you a ridiculously high interest rate and it reverts back to when you first started with them. So you end up paying interest on the total outstanding amount from day one. Some companies charge interest from the time of the actual charge. Some will give you a grace period of 25 to 30 days. Needless to say you should always get a card that is going to give you the grace period. New Credit Card LawsA simple but significant change is that the companies have to give you 45 days notice before raising your rates. The great thing about this is it gives you a chance to shop around for a better rate so you can switch companies if you are not willing to pay their additional intrest charge. This also includes any significant changes the companies want to make to your terms. It levels the playing field a little for the consumer for a change. In the past they only had to give you 15 days notice of these types of changes. By only allowing 15 days you didn't have the chance to shop around for a better alternative. Another change that has been made is the companies have to mail your statement 21 days before your payment is due. This will allow you some float time on your money and give you plenty of time to make sure you have the money to make your payment in full which is the only way I recommend using credit cards. There are more changes coming in February so please sign up for my newsletter so I can keep you updated.
One of the best places to borrow is through your brokerage account. When you purchase stock in a brokerage account you can apply for a margin account, if approved the broker will allow you to borrow 50% of the value of your stock in the account. The benefit of this is you can use somebody else’s money to invest in a stock and if the stock appreciates by 20% the only cost to you would be the interest. If you pay 5% interest that means your return on that investment is 115% because you didn’t have to put up any of the principal so the only expense was the 5%. On the other hand this can work against you if the stock goes down because as the stock goes down you are required to maintain a minimum balance in the brokerage account so you could have what is called a margin call. If you have a margin call you will be required to send money to get your balance back up to the preset minimum. If you can’t send cash the broker will sell shares of your stock to satisfy the debt. The nice thing about this type of loan is you never have to make monthly payments and as long as you investment stays positive you don’t have to make a margin call. However, you will be charged interest each month so it’s important that your investment goes up in value to offset the interest. Another place to borrow money is from the equity in your home. The benefit of a home equity loan is in most circumstances you can deduct the interest from a home equity loan from your taxes. It is very important that you invest this money in appreciable assets because you are now playing with your home. I don’t advise anyone to take the risk of loosing their home to purchase items like clothes or furniture. Some experts will tell you to use this money to purchase a car because you can deduct the interest but I don’t agree with that philosophy because the car is only going to go down in value.
I personally like to invest in rental property so I can hold on to the property until it appreciates enough for me to refinance the loan and take money out. The benefit of this is I don’t have to pay taxes on this money and somebody else is going to make the monthly payments for me as long as I can keep the property rented. Learn More About credit and other peoples money & Real Estate
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