Credit Cards: Beware the Evil Financial Instrument Walking Among Us!
By Cam McLellan
A little while ago I went on a rant against sharks in the property industry, those smooth-talking scammers who feed off humble, honest investors with expensive bogus seminars or dud properties. They will always remain one of my most hated types of people in this industry.
But there’s another cruel, evil, money sucking instrument at work here too: credit cards.
To someone like me, who tends not to stray from my core investment selection criteria and who considers the structure of my finance when I add a property to my portfolio to see how it will affect my cash flow, I just can’t understand how we have been so easily infiltrated by credit cards.
As I often say, property investing is a business. Therefore, I have no doubt that the world’s business owners wake up each morning and look across their bowls of cereal, just like me, thinking about cash flow, the most important thing to account for as an investor.
Yet, somehow, credit cards keep on becoming more popular, their insidious nature directly at odds with this considered approach to cash flow. I’m not sure how this happened but allow me to briefly explain why credit cards are so bad and why you should close your credit card accounts, like, yesterday.
Why Credit Cards Are Evil
Imagine if the bank was red, 10 feet tall with horns and a pointed tail. Well, the credit card is the pitchfork in its hand.
A credit card is basically just a short-term, high-interest loan designed to take the maximum money from your pocket in the shortest amount of time possible.
Credit cards are marketed in a clever way that makes it sound logical to use them in day-to-day life. Brokers also get paid fees from the banks to organise credit cards for clients, which means there are legions of sales teams out there promoting how great credit cards are.
As an investor, perhaps the most worrying element is that the banks will reduce your debt to service ratio (DSR) considerably if you have a personal credit card. This is because they deem that you have the ability to draw on its maximum limit. The bank will then calculate your maximum monthly repayment and add this amount to your DSR. This can have a huge impact when you are trying to get pre-approval for a loan.
Rid Yourself of Credit Cards
Our advice is to get rid of your credit card(s) as soon as possible. Use a debit MasterCard or Visa debit card for your personal needs instead and specify to your bank that you don’t want a credit card under any circumstances. Cutting up your card is not good enough. You need to cancel credit cards with the bank.
When buying investments, you need to first determine your borrowing capacity (BC). If you find you have enough for a deposit plus costs, it’s time to go investment shopping. If you’re still short and need more money, start saving or find some OPM to use. Once you determine your BC you know exactly how much you need to get started.
For an investor, getting started is the most important thing. Ensure you understand all the influencing factors, such as how a credit card may affect your investments. Check out this step-by-step investment plan – My 4-Year-Old the Property Investor, or read about what type of property investment is best for you.