This chapter will focus on credit and why it’s important. Credit when used correctly will only benefit you, it will give you access to other peoples money so you can achieve your goals quicker.

There are two types of debt, good debt and bad debt. Some examples of good debt are Mortgages, Margin Loans, and even sometimes Car Loans. Credit is a tool. When used correctly, it will make your life 100x easier. Think of it like a fire, when used correctly you get warm water, cooked food, and a warm home. Use it incorrectly and you get burned.

Examples of bad debt are Credit Cards, Payday Loans, and sometimes Car Loans. I included car loans twice because again, when used incorrectly it will BURN you.

Mortgages

A Mortgage is a home loan taken out with your home value used as collateral. This can be good debt because usually interest rates on home loans are much lower than other ways to borrow money, it also gives you a place to live (win-win!). This is why people usually take on second mortgages like (HELOC) Home Equity Line of Credit loans to consolidate debt since rates will be much lower than Credit Cards. This is also very risky because if you fail to pay the second mortgage, you can lose your home. So if you’re in a tough spot think twice!

Margin Loans

A Margin Loan is a loan taken against your stock portfolio. These also usually have a low interest rate and is cash that can be used for anything. The main use for these type of loans is for accusation opportunities in the stock market. It can help boost your gains, or worsen them if done incorrectly. The good thing about margin loans is that it doesn’t affect your credit score and there are no credit checks since the loan is backed by your paper assets (stocks). It is also very risky because if there is a stock market crash the broker (company/bank holding your stocks) can demand repayment. If you fail to repay, your stocks are liquidated (at a much lower value) to help repay some of the loan.

Example 1:
You have $5,000 in stocks and the broker is willing to lend you $1,500. You take this money and invest it and your $1,500 investment grows to $3,000. You basically made $1,500 with someone else’s money (what a great feeling!). So you sell, pay back your broker $1,505 (with the interest) and keep the $1495 you made!

Example 2:
Same scenario as above except this time your investment didn’t do so well and went down to $1,000. You cut your losses and sell. Pay back the $1,000 and you still owe your broker $505 since you borrowed $1,500 plus the interest.

Car Loans

This is a topic I categorize in both good and bad loans. It really depends on the situation. If you could avoid getting a Car Loan you should. Cars lose value very fast and having a depreciating asset while making high payments can just make the situation worse. For example if you sold your car and it was worth much less than your loan you still have to pay your loan back! (not very nice!). If it’s a reasonable amount and a low interest maybe you can consider it since having multiple credit accounts affects your credit score positively.

Credit Cards

Ah, yes the wonderful world of credit cards. I did categorize this debt as bad even though I love credit cards. Let me rephrase that for you. Credit Cards are good. Credit Card DEBT is bad. Holding a balance on a credit card is the worse thing you can do. Oh how wonderful! I can buy a $1,500 worth of stuff and only pay $50 a month? Sign me up! WRONG. Credit card interest rates at the time of writing this can range from 20%-30%. Just use this calculator to see what I mean. Enter the example values above and you’ll see that it will take you 4.5 YEARS to pay off and you’ll pay $1,199 in interest alone. In this example as well it’s implying you don’t buy anything else in those 4 1/2 years.

Again I love credit cards for the cash back and perks, all as long as you pay the statement balance each month. Some credit cards will even give you free flights, hotels, status, or upgrades. I will talk more about them in future chapters and even make some recommendations.

Payday Loans

Payday Loans are quick loans taken with a promise to get paid on payday. Predatory loans can go upwards to 300% interest and if you’re thinking of even getting these loans, I’d rather you max out your credit card at this point. Nobody should be borrowing half their paycheck and paying back with the whole thing.

Thank you for reading and have a nice day!
– Pablo