Questuosus

Credit – a powerful tool but a curse for the fool

During the last few years it has been easier than ever to access credit. Credit is one of the most powerful tools available for building wealth, but it can also be one of the most destructive tools for building debt. Some kinds of debt are actually good. In later posts we will discuss using debt to leverage enormous amounts of investment capital. Unfortunately debt can also be highly unproductive when it is caused by out-of-control consumer spending.

Cut Up Your Store Credit Cards

One of the worst culprits for building unproductive debt is credit cards. Bank credit cards usually carry a high interest rate; often several times the minimum lending rate posted by the central banks. Go ahead, blame the banks for being greedy if you like, but remember they are taking a big risk and big risks come with big rewards. Retail store credit cards are even worse. They typically charge over 28% annual interest. Carrying a balance on a retail store credit card is one of the surest ways to incur unmanageable debt. The golden rule with credit cards is to use them for convenience only. If you need extended credit use a lower cost loan to pay off your credit card balance every month.

A Slave to Interest

I have known people operate their personal finances in such a way that they have several maxed out credit cards. After paying down the balance a little, another consumer toy attracts their attention and, once again, they are maxed out. They are paying a huge amount of interest and often pay only the minimum balance on the bill each month. I’ll admit, I got into a similar situation myself once. But, instead of consumer debt, I maxed out several credit cards to support a business investment that went wrong. The end result is the same – you become an interest slave.

Independence From Debt

The process of building financial independence does NOT mean the elimination of all debt. I paid for an investment course once and one of the key things I remember is the instructor’s definition of a millionaire: a man who OWES a million dollars. Think about it for a moment. If you were to walk into your bank and ask for a million dollar loan, the bank would demand collateral of at least a million dollars. In other words, you would have to own assets of at least a million dollars in order to borrow that amount. And, if you have assets of a million dollars, then you are a millionaire.

Escape From Debt

We will discuss some innovative and clever ideas for escaping debt in a later post. The kind of debt you want to escape from is debt that you cannot service. If the repayments on your debt are unmanageable, then whether the debt is based on consumer spending, business or investment, you will be highly motivated to escape from its iron grip. However, if you owe millions of dollars and you can make the repayments then you are not only financially independent, but also very wealthy.

Administrator General Topics 10 Key Motivators for Financial Independence, Escape From Debt