Some of the prevailing expert wisdom is to only use debit cards because when you pay for something in cash, it hurts a bit more and you feel the pain immediately vs when you put a charge on a credit card you don’t feel the pain of the spend and therefore, you are less likely to curtail spending because, well, you don’t have to pay it until later. Also, the credit card companies are sharks and they will definitely nail you with high interest & late fees.
In summary, there are 2 reasons to not use credit cards:
2) High fees.
However, there are some very big problems that need to be addressed in the wealth building process on this subject.
I subscribed to this theory and these reasons back when I was 19 and just beginning to grow my business. I only used debit cards, for all personal and business expenses including carrying a sizable chunk of revolving inventory. When I graduated from college, I had saved up $50,000 in cash, and I had a pretty nice income of $80-$100k flowing in. I decided to buy a house as again that was the prevailing wisdom, because houses are great investments and they pretty much “always go up.” When I applied for the loan, they did this crazy thing where they checked my credit. Well, they discovered I had zero credit history and in fact I had a derogatory $175 charge from the long distance carrier that was supposed to credit that back but never did. So, not only did I not have any credit but I had a collection effort showing up on my report. I couldn’t get a home loan to save my life, in fact, I couldn’t even get a $3,000 credit card limit. Imagine my frustration when I had more in cash and more income at age 22 then most 40-50 year olds and I couldn’t get the loan.My parents ended up co-signing on the mortgage note for me which could have entirely been avoided had I built up some credit. I do believe that a good credit score is very important in the long term wealth building process as utilizing debt properly and making money off of OPM is critical to amplifying your returns and getting to financial freedom in time to have the health to enjoy it. What’s OPM you ask? Other. Peoples Money.
Yes I understand the argument that any debt has risk and the more debt load you carry the riskier your financial position is. And once again, let me argue that if you are only carrying secured, low interest debt with a strong equity position (it’s worth more than the loan), then even if the market corrects you’ll be ok. If you don’t have any liquidity (access to fast cash), and you’re carrying debt then yes that is very risky even with secured low interest debt because if your income gets disrupted, you are going to be forced into a fire sale and certainly be put in a losing situation.
You can establish good credit with credit card use, and pay off the entire balance every month, thereby eliminating interest. Further, you’re floating on THEIR MONEY for 15-25 days, depending on the billing cycle. My real estate partner Shecky has done this for years, and even through a lot of tough financial times, still has a 770 score. As an Entrepreneur and Investor, there will almost certainly be times where you will need to leverage your credit history to get deals done. Build that score up through the effective and responsible use of credit cards!
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