Pardon the elementary title, but we have something to clarify. Credit cards are embedded in our society; and no matter how much any financial guru tells you that they are “the devil”, no one is getting rid of them.

Let’s start off with THE BAD:

Like everything good in life, credit is abused. As we discussed in another article, What is Money?, people consume the productive value out of society without paying for it. It comes back to them in the form of debt with a penalty attached to it called ‘interest’. The only thing you receive for that interest payment is time. You get the product now, without having to take the time to save for it, in return for smaller payments over time.

I don’t think I have to beat the horse on issues created extensive debt. I’ve explained this in other articles. The fact is most people can’t handle credit cards. They are too often used like extensions of their own bank accounts. Their debts become liabilities…..

“What?”, you ask.

The simple definition for debt is “borrowed money”. Is that always a bad thing? The only time debt becomes a bad thing is when it becomes a liability instead of converted into an asset.

Robert Kiyosaki defines the terms Liability and Assets in his book, Rich Dad Poor Dad (On our reading list).

• Liabilities are anything that takes money out of your pocket.

• Assets are anything that put money in your pocket.

Robert also explains how he used a credit card to pay the down payment on a rental house. He bought TIME. He was able to forego pulling money out of his own pocket and delay that repayment over time. That allowed him to go out, find a tenant, and collect rent that paid all his expenses for the month, including the credit card payment, still making a profit. That debt is an asset.

In other words, borrowed money is an asset when purchasing time pays you.

There are other positives to credit cards as well. There are rewards like cash-back, airline points, and gas points. Many people pay all their bills and expenses on their credit cards to receive these rewards. They then pay off the full balance on the due date. But, those are nothing in comparison to the ultimate perk of credit cards; protection!

A couple months ago, I was shopping for new windows for our house. I was budgeting for them and decided to go ahead and get quotes. The sales guy showed up at the house and priced out some windows for $18,000. But wait, there’s more!!! If I booked them that day and pay them a 30% down payment, I would get 50% off!!!

Now, obviously this is a cheesy sales tactic, but I went along with it to see the terms. Down payment would have been $2,700 and the remaining balance of $6,300 due upon completion. I would get a 3-day full refund guarantee and completion date was 12 to 16 weeks out.

I could have paid cash for the down payment and had plenty of time to save the cash for the remainder in 3 to 4 months. But, knowing the value credit cards provide, I went ahead and paid the down payment with it. Sure enough, I got buyers remorse the next day. I did some research and found that I could get the same windows cheaper elsewhere.

According to the refund policy, I had to provide the company my order cancellation in writing. So, I provided that and made sure to call and confirm cancellation. I never did get them to confirm it. I got a “call us back tomorrow to confirm”. I began to get worried that they would drag out the process and miss the window for a full refund.

The remedy was simple. I popped open my credit card app and disputed the charge. Within 5 days, the charge was removed from my balance. I didn’t have to fight with the window company to get my cash back. I didn’t have to drain my savings account asset. There was no risk. There was no investment from me other than thought and emotion.

So, what did I do? I purchased time at no cost. Time to make a sound decision after making a emotional decision in an attempt to not miss the “great deal”. This level of protection is immeasurably valuable when making large purchases and when used properly.

Summary:

For most people, debt/credit cards become Liabilities because they are used wrong. You shouldn’t be using them until your personal financial house is in order. They can become a trap otherwise and become the master of your future productive value.

Use debt only when it serves the purpose of being a tool to profit or protect yourself. With debt, you are buying time. Don’t use that tool unless time is going to benefit you. In most cases it doesn’t and actually hurts you. So be careful.

AMP FC is here if have questions on credit card usage. We will give you a second set of eyes, detached from the emotional transaction taking place, and offer you advice based on the logic provided above.

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