If you have a lot of money, you probably don’t need credit for anything since you could pay cash for houses, cars and other purchases. But the rich borrow frequently, take out loans such as mortgages, and use credit cards.
The difference is that most rich people follow a few simple rules when borrowing to help them make sure their loans improve their financial situation – rather than leaving them worse while making their creditors richer.
The good news is that anyone can follow these rules, even if they are not rich. Here are three guidelines you should consider adopting like your own.
One Email a Day Could Save You Thousands
Expert tips and tricks delivered straight to your inbox that could help save you thousands of dollars. Register now for free access to our Personal Finance Boot Camp.
By submitting your email address, you consent to our sending you money advice as well as products and services which we believe may be of interest to you. You can unsubscribe anytime. Please read our privacy statement and terms and conditions.
1. Use debt as leverage to grow wealth
When the rich borrow, they do it because they want to improve their overall financial situation, and they can do so by leveraging the money provided by lenders. You can do the same.
For example, a wealthy person may take out a loan to buy investment property that produces constant income and increases in price. This can increase their net worth as the value of their assets increases. Or they can use a margin loan to invest more money in the stock market so that they can try to earn a higher return.
Rich people may also decide to borrow because it allows them to make better use of their resources. For example, it is common for the rich to take out mortgages. This is because the interest rates are low and the interest is tax deductible. Rather than locking their money in a house, they can get a low-interest loan and invest their own money in assets that produce a better return.
2. Avoid borrowing for consumption
Typically, the rich don’t borrow to buy consumer goods they can’t afford. For example, they wouldn’t charge their credit cards for groceries and pay off the balance, or take out loans to fund expensive vacations or to buy costume jewelry or clothing.
Rich people to do often use credit cards, so they can earn rewards – but they pay off the balance in full so they don’t pay interest. By living on a budget and avoiding going into debt on assets that don’t increase in value, you can also borrow like a rich man.
3. Avoid predatory lenders
Finally, the rich avoid high interest loans with unfair terms such as extreme fees and very short repayment terms. This includes auto title loans and payday loans.
That said, it’s easier to avoid this type of loan when you’re rich and have good credit – and when lenders are competing for your business. But it is a good idea to try and minimize this type of debt even if you are having financial difficulties. If you don’t have perfect credit, for example, consider a government guaranteed mortgage instead of a subprime home loan and look for a payday loan alternative from a credit union rather than a loan. payday or a car title.
These rules are definitely harder for the average person to follow, but if you can do it, you might increase your chances of making some more money. Then you can make lenders work for your business – and feel confident that you won’t have to borrow unless you do it for a strategic reason to improve your financial situation.