The Three Basic Uses of Credit
November 3, 2008 – 4:57 pm- Worst—to purchase perishables, such as meals, gas, groceries, airline tickets
- Better—to purchase depreciables, such as automobiles, furniture, clothes
- Best—to purchase appreciables, such as mutual funds, a home, or other investments
Charging perishables is the least desirable and most misused form of credit. It gets you into credit trouble with nothing to show for it. One month after you charge an expensive meal, your minimum payment covers the potatoes, the next month the steak, and in a few months the dessert. While buying this month’s food, you’re still paying for last month’s feasts. Payments linger long after the goods or services are gone.
Purchasing depreciables on credit is not quite as bad. These are goods and services that will never again be worth what you paid for them, although their use and enjoyment will at least last as long as the payments. A better use of credit, yes, but you end up stacking long-term payments on top of long-term payments that can eventually bury you.
The best use of credit by far is borrowing money at a low rate and investing in appreciables with a higher rate of return, or in something that will grow in value. In other words, making money work for you. Appreciables include a home with a mortgage, margined mutual fund shares, rental real estate, and a leveraged business or IRA. Leverage is the use of borrowed money to make money—often called using OPM (other people’s money).
Financial success requires practiced discipline, and there is no better way to practice than with credit management. It is not necessary or wise to cut up your credit cards as some would have you think. Developing discipline is the answer, and the following strategies will get you started—painlessly.
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