the Wealthy Canadian

Yesterday I told the story of Joe, an unfortunate victim who got caught in the jaws of the credit trap.  Joe made liberal use of his credit to buy all the things he never wanted. Then watched as it spiraled out of control.

To be fair cheap credit can be a great thing.  It is the ease with which we get it and how we use it that determines whether or not it is a good thing.  Easily obtained credit and cheap credit are two different things.

Financing a house at 4% is definately cheaper than financing it at 4%.  Being pre-approved for twelve different credit cards at the same time while purchasing that dream home is ease of credit. Combining the two can be deadly.

Here are a two tips to help avoid the credit trap.

1. Pay cash for everything!  You can only spend what you have.  An alternative for the more disciplined is use free reward credit cards to pay for everything (and get the cash back, or free groceries) – but only buy as much as you can back with cash.  This takes much more discipline and you need to be extra cautious for the trap.
2. Buy only what you can afford.  It is reasonable to assume that you will need to take out a mortgage to buy a house but buy one that makes sense given your income – not what you can afford based on the monthly payments!

That is it, two tips to sum it up.  Buy what you can afford and pay cash (or equivalent).

Paying the maximum payment you can afford every month for a house is not a house that you can afford.  What happens if/when the payments go up?

If you want a big screen TV, plan for it in your budget.  It may takes months to get enough cash but you will know that you will have enough to pay for it.

Thinking of a car loan?  What happens if you finance that shiny new Escalade for $50,000 and a few months later get into an accident that destroys it?  By that time the car has depreciated, as car do, to below what you owe on it.  E.g., insurance offers you $40,000 but you still owe $45,000.