When Do You Use Credit?

[GuestUser202]

So I'm reading the book now, but I am getting conflicting messages from it about using credit. I'm not that far along in the book, but I remember MJ saying he basically lived off his credit cards when he moved to AZ. A few chapters later, the message I get is don't ever use credit, pay cash for everything. So my question then is when you are 1st starting out building your business, when do you use credit? Or is there even a time at all to use credit?

 

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[Hooked]

When the cost of cash < the return on cash, use credit.

 

[GuestUser202]

Isn't that backwards? Should it not be when the cost of cash is > return on cash use credit?

 

[D11FYY]

Did MJ not state in the book that he only used Credit Cards to purchase Limos.com?

Because
1: It lined in great with his business
2: It was a bargain price at the time
3: Resale value

Sorry if im wrong just I need to refresh my self with TMF shortly.

 

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[GuestUser202]

Did MJ not state in the book that he only used Credit Cards to purchase Limos.com? Because 1: It lined in great with his business and 2: It was a bargain price at the time 3: Resale value

Sorry if im wrong just I need to refresh my self with TMF shortly.

I'm not sure. I can go back and look.

I guess my real question is how or when do you justify using credit to build the business?

 

[ZCP]

More importantly....... How many have you sold??

Nothing else really matters.....

 

[MoneyDoc]

When it's appropriate.

Good debt vs Bad debt.

Example:

Using a credit card to buy a car that you don't need = bad debt

Using a credit card to buy the next $500 shoes because you want to look cool = bad debt

Using a credit card to fund your existing business = good debt

 

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[Hooked]

Isn't that backwards? Should it not be when the cost of cash is > return on cash use credit?

No. Why would you want to pay more for the cash than you can make on it? That's the exact opposite of arbitrage, and a great way to lose money

 

[GuestUser202]

When it's appropriate.

Good debt vs Bad debt.

Example:

Using a credit card to buy a car that you don't need = bad debt

Using a credit card to buy the next $500 shoes because you want to look cool = bad debt

Using a credit card to fund your existing business = good debt

Good! I'm in line there!!

 

[Durete]

I could not imagine using credit ever, but then again credit cards are a thing of the past in my country/culture.

However, the only time I could imagine using credit would be:
- You have to pay something right now and do not have the money yet, but know that you have that money coming in from a source (No guesstimates here, only hard numbers)

I always learned to not be in dept, so I will not be in dept if there's any way to counter it, and credit is a form of debt.


Then again there might be some pro's for americans since of the extra benefits that they get (the rest of the world doesn't get those high returns, miles or any other benefit to the rate that americans do.)

 

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[GuestUser202]

I'll be at a point where I don't need credit. My purchase this weekend is guaranteed to get my money back, if not double or triple it, and probably within a months time (which is why I felt I couldn't wait). I was just very conflicted on the purchase because 1) the message I get from the book is conflicting to me 2) I hate using credit 3) my girlfriend hates me using credit.

 

[Ecom man]

I use credit all the time for just about everything! I make 1% cash back on 20k+ per month in purchases. $200 a month profit bump for doing nothing isn't too shabby. My Adwords campaign costs go right on my credit cards. My shipping costs, right on my cc as well. I never carry over a balance and use them rather than let them use me. Everything can be a tool. It comes down to how you use it.

 

[GuestUser202]

@Hooked-perhaps I am just interpreting that differently, but understand what you mean.

 

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[Hooked]

The great thing about math is that there's no room for interpretation. Take an example:

1. I get a return of 15% on cash. It costs me 5% to borrow cash. I get to keep the 10% spread.
2. Now say I get the same 15% return, but it costs me 25% to borrow cash. I lose 10% on money I don't have.

The examples given by others in this thread meet this qualification too:

• MJ's credit card interest (cost) pales in comparison to the millions he made with the business it allowed him to create (return).
• Rewards (return) are free money if you pay off the balance before incurring any interest charges (cost).

So when cost of cash < return on cash, leverage!

These are all very basic examples of very basic math. There's obviously more to it than just that when it comes to applying it, and there IS room for interpretation regarding other contributing factors i.e. opportunity cost, risk cost, etc etc.

Considering that, would MJ's use of credit have been justified at the time? It's easy enough to say YES now, but countless similar stories that resulted in bankruptcy due to credit card debt make it just as easy to say NO in those cases. But at the time, there was no knowledge of the future return so you couldn't just plug in a simple formula to decide. If only...