We teach kids to not begin a sentence with the word “Because.” We tell them the smallest things in the universe are atoms and molecules. But when the kids grow older they learn about proper grammatical structures and subatomic particles and inevitably realize that the information they were taught as children were simply inaccurate . Popular financial advice like “Don’t carry a balance on your credit card,” can be misleading as well.
One favorable reason to carry credit debt is for investing purposes. Earlier this summer, my pal at Finance Journey updated his June net worth where he had multiple credit cards with a combined balance of $26,800.
Being $26,800 deep in credit card debt may sound like a bad situation to be in, but he was actually leveraging the promotional low interest rates on his credit cards to buy large cap, blue-chip companies that paid him more dividends than the interest he accumulated on his credit card loans.
He’s an average, middle class guy but he’s managed to grow his investment portfolio to about $100,000 in just a couple of years thanks to his modest savings and credit card leverage. Even low risk government bonds will still yield a higher return than the cost of those special credit card rates. If we know for certain that our borrowing cost will be low for a set period of time, and higher returns can be made elsewhere, then we can use the opportunity to make some extra money at virtually no risk
Credit cards can also be used as a bridge loan, for example to cover the cost of buying a new car before selling the old one. It’s a way to use other people’s money at no cost to us. Many people including myself also use credit cards as emergency funds When I received a promotional 1.9% balance transfer last year, I did not hesitate to carry a $5,000 balance for many months. My credit card loan became part of the money used for a down payment.
Simplified financial advice is designed to connect with the most number of people so it tends to be generalized. Believing credit card debt is inherently bad is like believing humans evolved from apes. It’s just a convenient lie we tell kids because their brains are not developed enough to comprehend the real truth. But we’re not kids anymore. We must look at credit cards objectively and make decisions based on facts, and not on stereotypes.
We shouldn’t borrow money just for the sake of having debt, but in some circumstances carrying a controlled amount of credit card debt can be our best option to financial freedom At the end of the day what really matters are results. Crunch the numbers and do whatever makes sense to you.
Random Useless Fact:
Both humans and apes evolved from a common ancestor that lived 5 to 8 million years ago. Given the right conditions, a modern ape species might evolve into something like a human, but it would take millions of years.
Good point Liquid. A lot of wealthy people have used leverage to build their assets and then reduce their leverage as their personal wealth grew and they had no need for additional borrowed capital for expansion. I think it boils down to understanding debt and using it responsibly. People seem to not understand this and in this absence the generic advice is given to avoid debt. As you rightfully say, what matters is crunching the numbers and doing what’s best for you not just taking generic advice.
That’s my conclusion as well. Some people don’t understand what debt is and how it works so they listen to the most convenient solution, which is to just avoid altogether. Of course if they take some time to learn about debt from a global finance perspective they would realize that debt is all around us and we’re all forced to use debt everyday. Even if someone pays for a Starbucks coffee with his own savings, he’s still paying for it with debt, except it’s someone else’s debt lol.
Interesting post Liquid. I’ve always felt that the credit card approach was a little risky. After all you’re buying stocks with credit card cash advances I presume. Even with the low rates they are only for 6 months to a year. This year, as you rightly point out, FJ made money because the stock market has been on a tear. But if it went the other way then what? The low rates are really short duration which would leave you vulnerable to a market correction. Then you’d be forced to sell your stocks at precisely the wrong time or try to cough up almost 10k to pay off the card. If you failed to do that then you’d be paying a much higher interest rate which would defeat the purpose of the whole exercise to begin with. While I acknowledge that FJ has so far been successful at this, I personally think that is one hell of a gamble.
For sure. The Bernanke Put will not last forever. Even without a high cost to borrowing leverage is still leverage 🙂 It would be interesting to see how FJ will get himself out of this conundrum once all his low credit cards rates start to expire.
With 0% or low interest debt then I can see it making sense to forego debt payment to invest. But I personally wouldn’t feel comfortable using credit cards this way to fund investments. In theory it works and it works more like a cash advance so you’re essentially getting the opportunity to jump your future savings forward and invested today. That can be a big advantage but I think it really depends on the stability of other income sources that you have. My job income is fairly secure but since I work in the oil field it’s one of those areas where literally within a week or a month the work force can be cut in half or more. So for that reason I wouldn’t be comfortable doing this but I can’t fault someone for taking advantage where they see opportunities.
I didn’t know you work in the oil field JC 🙂 I heard Leonardo DiCaprio recently visited Alberta. Maybe you got to see him. I agree about the relationship between risk tolerance and income stability. If I didn’t have 2 jobs I would probably be less likely to invest using credit card debt.
A lot of credit cards often charge a balance transfer which amounts to a hidden interest rate. For example, it may be 0% for 3 months, but they may charge 1% for when you transfer a balance to that card. Something like that may land up being equal to more than a 4% rate. Still cheap, but not a free lunch.
Much like how you can buy a car from a dealership with a 0% rate. They often have a side-by-side cash price which is lower than the price when you finance at 0%. If you punch out that difference in a financial calculator, it is often around the 6-7%, sometimes even more.
I don’t know if those cards you’ve mentioned above have a hidden interest component; but if you are serious about this type of financial maneuver, you may want to read the fine print.
Those car dealerships are really sneaky. Same with credit card companies and banks. There are usually many hidden fees and requirements when using these low interest rate cards. The 1% transfer fee is a common one that I’ve seen. Another rule is anything you purchase with the card will still be charged at the regular full interest rate of the credit card because the promotional interest rate is only for balance transfers. Definitely be sure to read all them fine print details.
Even tho I am firmly against credit card debt but this idea works. But u gotta make sure u r on top of the promo dates and minimum payments and managing it all. Just the hoops u got to jump through I would pass on this idea but for someone that very clever and disciplined just starting out it seems like a good strategy.
There’s a lot of value in keeping your finances simple 🙂 It was a great learning experience for me when I did the balance transfer last year, but it did use up my time. Thankfully I only have 2 credit cards, and usually only use just one.
Hi Liquid, Thank you for sharing my blog post. This is a great honor for me. I was away on Vacation late August and early September, then very busy in catching up work that I missed during the vacation (10-12 hours on computer). I missed so many blog posts in your blog and other PF blogs last couple of weeks. I will read them all.. Great to see many comments about the leverage investing approach, I know it is not suitable for everyone. It is not a bad idea (at least for me 😀 ) to buy a great dividend growth company pays 3% – 5% dividend using a loan with interest rate 1% or less. You could get 2% – 4% extra money, and the dividend growth and capital gains are bonus. I always have a backup plan (margin loan at 4.25%) to pay down the debts when the low rates are about to expired. I am using this low promotion rate credits for last couple of years, most of the time I was able to extend the expire dates, but sometimes I pay down using margin loan and borrow back for another 6 to 12 months. In late… Read more »
Hope you had a great vacation. It’s hard to predict the market, so just stay invested for the long run. Good point with the SUV example. At least you bought appreciating assets with your debt while most people spend it on consumer goods 🙂
I’ve never had a credit card with a promotional rate low enough for me to take advantage of it… or with a limit that carried any weight. I get those promotional offers of a 1.9% interest rate, but it’s usually only for balance transfers. Maybe I could borrow cash from one credit card then transfer the balance? I guess that’s how I could get it..
I have a LOC with an interest rate of 3.5%. I invested a small amount from that but my net gain is probably only about 3%. Maybe should have made more aggressive investing choices but I was nervous about using debt… not sure if I have enough assets to feel comfortable gambling quite yet, but as my balance grows I’m definitely getting there.
That’s a great rate on your LOC. Mine costs about 5% at the moment and I’m trying to pay that down as quickly as possible.
It’s all in the numbers… Learn basic math and prosper! it key is to make sure that the plan you set today to leverage said numbers, needs to be followed through, meaning if you use leverage, be ready to cover the leverage with your investments at some point before the numbers are no longer favourable. Some would call this market timing, but others would view it as an eventual necessity, and why someone who leverages large sums skims profits off the top in good times to reduce the leverage for when bad times returns. – Cheers.
Basic math is important. Good thing investing doesn’t require complicated calculus or anything. A grade 10 level math, common sense, and discipline are usually enough for most investors to succeed 🙂
Question is are you able to pay back your CC promo by the time it expires to avoid the hefty % spike? Got to plan for the eventual pay back somehow… some might get into a dicey situation, some might prosper… leverage to your own risk.
That’s probably how credit card companies make money from people who otherwise regularly pay of their balances. A small miscalculation like forgetting about the expiring date or can’t find enough money to pay back the balance can be a costly mistake.
You really need to watch your dates like a hawk if you want to the benefits of the low credit card rates. You’ll probably need to know exactly when those promotional rates end so you can switch it to another low promotional rate or pay it out. It’s great that you are able to take advantage of it. I on the other hand tend to slack off on being aware of these due dates which can lead to $$$$.
It does feel like a hassle to keep on top of it. We have to weigh the effort against the benefits.
Interesting idea. I wouldn’t be comfortable with this but some people are comfortable using credit card to leverage.
It was fun when I tried it but it’s not something I’d do very often, especially when I have other debts I want to pay down before heavily investing in new stocks again :0)
While in theory the practice of using a credit card promo to leverage your investments sounds like a good idea on paper, the reality is most people cannot handle that type of fiscal responsibility and find themselves in pervasive debt. I’m not against 0% or low interest “loans” but it has to be managed super carefully. Communism is a great concept too, on paper.
When I was younger, like around 10 years old, I thought communism actually sounded like a good idea. History shows that it hasn’t been lol.
I am a little late catching up on my blog reading but.. Lot of good points here. One has to differentiate between the crowd that Gail V. O. caters to, and the more responsible investing crowd that has a long term financial plan that they are already on some solid footing.
I just want to add whoever does this should always leave themselves some more credit leeway. You never know, you might have a transmission in your car go, or a sudden expensive home repair. So if you extend yourself to the limit then something happens that’s when the house of cards could potentially unravel. This is why it’s so tough for people who live from check to check and already have some debt piled up. A sudden bill can put them into bankruptcy.
That’s true. The median net worth of people who read this blog is 50% higher than the national average. Different messages for different crowds. With so many people claiming to be living paycheck to paycheck I’m actually surprised not more people have filed for bankruptcy lol.
That picture of that little baby monkey.. OMG. It reminds me of Baby Bun.
Scientists have said that the DNAs of humans and chimpanzees are 99% the same 🙂
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