Credit: When And When Not To Use It

Credit.

This is a word all americans know. They know what good credit is, what bad credit is, and most of us cannot live without credit.

While there are certain times when it is advantageous to use credit, most of the time this is not the case.

When to use credit:

-To buy a house or condo and stop paying rent.
-To buy a car, bike, motorcycle, etc. because it is necessary.
-To pay for education
-In an emergency

When not to use credit:

-For anything else.

The problem with credit is you en up paying much, much more for an item or service then you would if you just payed cash. A cheap credit card likely has an APR close to 15%. This means that for every dollar you spend today, you will pay back $1.15 a year from now.

If taking out a mortgage will allow you to stop paying rent, it is worth it, because in the long run it saves you money. This does not mean you can buy a vacation house with a mortgage. Mortgages can turn very expensive, and in current times, real estate is not exactly a good investment. 10 or 20 years ago it made sense to buy property on loan, because real estate appreciated more than what the mortgage charged in interest. Nowadays, this is not so in most of America. If you take out a mortgage for $100,000 at 5.44% for 30 years (5.44% is the average today for 30 year mortgages, and 30 year mortgages are the most commonly used in America), you would pay $564.03 monthly. This translates to $203,050.80 total. Over twice as much. It makes more sense to save the monthly rate for 15 years and then buy the second house. This also helps because you have a good financial cushion to fall back on in an emergency situation, and don't have to borrow even more.

If you need a car, feel free to take out a loan, but buy a car you NEED, not a car you WANT. This means, if you have no money in the bank, buy a $15,000 dollar car instead of that BMW you have had your eye on. Later, if you make more money, go ahead and buy the BMW, for cash, not for credit.

If you need a student loan to get through college, go ahead and go for it. When it comes to education you don't want to go to a less renowned school because you cant afford to pay a good tuition. This is the best investment you can make.

If you want new clothes, a new TV, stereo, computer, etc. you don't use credit. Unless your only computer died and you NEED another one, wait till the next paycheck comes in, and then go buy it. Or if you have money saved, buy it with that, not credit.
This will make it cheaper, and if for some reason you lose your job, you wont be left with thousands of dollars in bills.

Introduction

Hi:

I am a student at MIT, but also invest and consult for businesses in my spare time. I'm creating this blog mainly because I have had many requests for help managing their money from people from every imaginable background, education level, and even income level.

In America, the average family's savings are equal to less than half of their yearly gross (pre tax) income. While this can work in good financial times, nowadays, it is a dangerous way to live. What if you lose your job? After less than 6 months, you'll have burned through your entire savings and have to start taking out MORE loans. I say more loans because as well as not saving, Americans live under piles and piles of debt.

In this blog I will explain how to take control of your assets, without affecting your lifestyle.