I love Dave Ramsey. Who doesn’t?
He’s energetic, he’s a positive leader and I wholeheartedly enjoy many of his lessons on the topic of financial responsibility. Teaching people how to better handle money and invest in their futures, are all things I agree with and passionately defend.
However, there’s one lesson that’s taught by some financial guides that I respectfully disagree with.
And that is that any form of debt, or using credit cards, is bad.
Don’t get me wrong, I get where this thought process comes from. On shows like Dave Ramsey and many others, they talk to people whose lives have been ruined by poor decisions with credit cards.
The vast majority of the individuals who they help are not responsible enough to run high amounts of debt on a credit card.
But I can’t help but feel that there’s an important distinction to be made between different types of debt, and the ways debt could be beneficial in your life.
Good debt and bad debt.
I firmly believe there are few absolutes in life, and that applies to finances and credit cards.
To state an absolute truth saying all debt is bad isn’t true. While there are certainly negative and harmful examples of debt, there are also cases where debt can be good.
Here’re some examples.
There are some cases where having $16,000 of credit card debt is a bad form of debt. And there are other situations where having this same amount of debt isn’t bad. I can speak from experience, as I was personally able to start my business from running high amounts of debt on my credit card.
For instance, if you have $20,000 in debt for buying TV’s, furniture, or frivolous vacations, then that’s an example of bad debt. However, if you’re using $20,000 to kick-start your business, and are able to pay it back and fight off the interest, then you’re doing pretty good.
Building your credit score itself is a beneficial act, and you accomplish this by borrowing and then paying back what you owe to the lender. It doesn’t matter whether you’re a small business owner or not.
And when you’re buying a home, you’ll need a good credit score in order to get a better interest rate, unless you’re going to buy a house with 100% cash in hand. (which frankly most people can’t do) Not to mention, as you borrow over your lifetime, you’ll also need to borrow and then pay it back in order to boost your credit score, when making larger purchases like a home. Not to mention a better interest rate saves you money.
If you buy a car, if you buy a house, if you want to do any of those things, it takes credit and a good credit score. If you do ever want to open a business, it’s based upon a lot of your credit score, and if you don’t have a credit card or debt that you continually pay, you’re going to have to either drop more money upfront or jump through extra hoops to get what you want.
It’s not a perfect system, but you can benefit from running a debt.
The credit system is not perfect, but it’s how the financial world works.
You can hate the game, or you can just learn to play it.
Our company, wouldn’t be here if we didn’t have credit cards. We used our personal credit cards to create our business. Because I always relied on credit, I’ve been able to pay off many purchases, and increase my limit and access to funds.
Because of good financial habits, I can easily get access to hundreds of thousands of dollars on credit cards. People are always shocked by that fact, but truthfully I was able to use that credit limit to help build our company, especially in the early stages.
Making money on debt.
Have you ever heard the saying make money with someone else’s money? This is the #1 way that Banks make money. They get to loan out money based upon their total deposits. They actually get to loan out several multiples more than what they have, which is backed by the federal reserve.
That’s a discussion for another day, as it’s lengthy discussion. The point is, almost anyone in real estate uses debt to grow, invest and make money using the bank’s money. You don’t think any millionaire pays cash for their investments, do you?
Many Credit Cards have 0% promotions that can go from 12 months to 21 months of no interest or fees! That’s free money that I was able to put to work and make money with. You just need to make sure you have plans to pay off the balance prior to the expiration of the promotion or be prepared to transfer that to another Credit Card for 0%.
Most Credit Cards also have rewards. The cards I use, give me 2%-5% cash back. I then pay the balance off prior to incurring any interest. I also get more buyer protection using a credit card. Meaning extended warranties on purchases. Fraud protection, free rental insurance, etc.
In my opinion, I would be actually foolish to not make a purchase with a credit card, even though I have the money in my account to pay for the purchase. Credit Cards typically give you more protection than a debit card. Plus the more I use, the higher my credit limit increases. Which also improves my credit score and ability to borrow in the future while getting my better interest rates when/if I do want or need to borrow.
I hope that you never NEED to use a credit card or Line of Credit for emergency purposes, but let’s be honest, you would be glad if you had the availability if you needed it.
That’s how the banking system works. You really need to get the credit, get the borrowing ability, before you actually need it.
Also, take note that certain debt is tax deductible, like your mortgage interest or HELOC (Home Equity Line of Credit). So, not only is it typically the cheapest debt, it also lowers your taxes. Probably some of the last debt you want to pay off if you have any at all.
We’ve also offered similar debt plans to our clients. For example, some of our customers have needed credit card terminal equipment, and they didn’t have the money up front. Sometimes they would save $100/month by switching to us. So we helped them by being willing to finance their equipment over a period of time, while establishing a merchant services account.
In these scenarios, it definitely cost us up front because we ate the equipment cost, but we were both able to mutually benefit from this arrangement as we earn profit from their merchant account, and they now have the equipment they need to run their business more profitably.
How this works.
How do I know this is going to work for you?
It’s a simple math problem.
Here’s a great way to see if running a debt can earn you money.
Let’s say you have to make an investment of $600 dollars. This investment is going to make you $100 dollars a month. And in six months, you’ll start reaping the reward of a return-on-investment (ROI). The result of this venture is that you’ve paid off the $600 investment, with the $100 revenue generated per month, and you now will have your debt paid off.
Then, in a one-year timeframe, you’re making a profit of one hundred percent. This involves you temporarily going into debt, however, if you didn’t go into debt and leverage yourself, you would have lost the 100% return on that money.
Again, this is how the financial system, as well as making money works. It risks versus reward, which is simple arithmetic.
A lot of ways debt can go bad.
There’s a lot of mistakes people make when using credit cards.
How you manage your debt does matter, and sadly, not a lot of people are educated in it. In my experience, I’ve found that most people are not taught how to use credit cards responsibly, or understand that they need to pay off this credit card debt within a certain time frame.
As I’ve stated before, there are a lot of gray areas in life. Very few things on this earth are extremes. Here’s what I mean by this.
Let’s talk alcohol. I personally have never consumed alcohol in my life. Is it bad? No, it’s not. But if you have a highly addictive personality (like I do), then yes, drinking alcohol can be bad for you. If you have a genetic predisposition to alcoholism then, by all means, avoid drinking liquor. By having this type of personality, drinking alcohol can lead to becoming an alcoholic, along with many other unintended consequences. But not every instance of drinking alcohol is bad, it depends on the person and situation.
The same can be said for spending money. If you don’t know your limits, and won’t control yourself, then you shouldn’t allow yourself a credit card if you can’t manage it properly.
Anything in this life can go bad when not used responsibly. Too much sugar consumption can lead to diabetes, too much alcohol can lead to alcoholism, and debt that’s not managed correctly can ultimately go south and lead to bankruptcy, quickly.
Instead of letting credit lead you astray, you need to understand your limits and use credit cards with discipline. This is true with most aspects of life. I’ve found that this practice really depends on the individual circumstance and individual person.
I want to a share one final thought about debt.
In life, you’re always going to have purchases that most people cannot buy with cash.
You need to build your credit and borrowing ability before you need it. If done right, it costs you nothing, in fact, you should make money doing it.
You’re going to have a mortgage and an interest rate if you desire to buy a house. Along with owning a home, and the correlating interest rate, there’s more expenses involved. From this, you’re not necessarily making a profit. However, this is not a bad form of debt.
I have credit cards to this day and continue to use them. But, just like everything else, I use them responsibly. I don’t have a huge cash savings account, and some might not agree with that. Which is fine. I have cash available, but we’re talking pretty minimal compared to what I have in terms of available credit. I still do have a fair bit of cash lying around for emergencies, but overall I use my cash to make more money. I have access to credit for situations where it’s deemed “in the case of emergency.”
Looking at the context that surrounds the debt, and whether it’s beneficial in the long run to have a debt, can help you make better financial decisions. Paying for everything with credit cards may not be the right solution for you, and that’s good. But don’t be afraid of going into debt, if you can gain recurring growth from it.
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