In the current financial climate, companies find it harder and harder to obtain credit. Refinancing of existing debt is also done at a higher cost.
Ironically, access to capital has never been easier for consumers. Banks continue to promote credit cards and credit lines relentlessly. My phone rings regularly with a promotion from XX bank for YY card, or an offer from ZZ bank for a balance transfer.
A credit card, if used carelessly, can cause one to overspend beyond his means. The ultra-high interest rates can also cause one’s debt to grow out of control. The same applies for lines of credit.
On the other hand, a credit card (if used carefully) allows one to get free credit and cash rebate for his purchases.
Here are some tips to bear in mind when it comes to using credit cards and lines of credit:
Should you use credit lines for investments? It’s definitely not recommended for 99% of the people. Many people have also lost a fortune from the use of margin facilities provided by brokerage firms.
Having said that, sometimes there might be exceptions.
For example, I was once offered a 6-month cash advance at an interest rate of only 1.99% p.a. At that time, money market funds were earning close to 3% p.a. It was a no brainer for me to draw out money from the cash advance facility and put it into the money market fund.
For a 6-month period, the profits works out to be an absolute return of 0.5% on the cash I drawn out. This might not be much but remember the cash is free.
Some people might think this is too much of a hassle and only worth doing if the amount is huge. Yes and no.
Yes, it’s worth doing if the amount is huge.
No, you should still do it even if the amount is small. Why? Managing and allocating capital is a skill. While the skill needed to allocate $1000 might be different from that required to manage $1,000,000, there will be similarities in the mindset and mathematical skills required.
I believe that one should start small, cultivate the correct habits and mindset, and grow in knowledge and skill along with the portfolio. If you do not even know how to manage $1000, what makes you think you can manage $1,000,000 when it is given to you?
Furthermore, it’s always better to make mistakes with $1000 than to make them with $1,000,000.
We often read stories about how winners of big lottery prizes often return to where they were financially after a few years. They didn’t have the ability to manage the money, and promptly spent or lost them all within a short time.
Debt, in the hands of a good master, can serve you well. Use it wisely.