The Importance of Credit

A common set of advice is usually given when working towards financial freedom. These might include living below your means, working with a budget, saving for the long haul, paying off your mortgage, and paying off your student loan, as a few examples. All are good advice, but financial advice often seems to miss one crucial concept; credit.

You wanna know what’s more important than throwin’ away money at a strip club? Credit. –Jay-Z

It’s believed money is what makes the world go, but in reality, since most of us don’t carry paper money, credit is what makes the world go around.

No matter what financial path you take, credit is involved. Your mastery of how credit works and how to leverage it will ultimately determine your wealth. Improving people’s credit knowledge is one of the reasons I wrote my book to help people understand how credit works on the homeownership side. But equally as important, you need to know how vital a role credit plays in wealth creation and generational wealth.

Your inability to understand it or over-leverage it will determine your poverty level. See, standard financial advice focuses on basic credit management but often fails to discuss how our entire economy and wealth creation are based on credit. Paying off your credit card each month is good, but that’s not what I’m talking about here.

Credit enables a person to start a business, buy a house, buy a car, pay for medical expenses, pay their employees, send their kids to college, buy mutual funds, buy revenue-generating property, etc. When credit is readily available, it raises everyone’s assets; when it’s not available, it decreases asset prices.

To utilize credit properly for wealth creation, you only need to understand one straightforward thing when using credit.

When you utilize credit to purchase an asset, the asset purchased should generate a sufficient cash flow to service the credit payments. Using credit to buy assets without an income stream to service the debt will lead to poverty in the long run. Therefore, avoid using credit to purchase assets or things in large amounts that do not offer an income stream to service the associated debt payment.

It’s that simple. The 2008 economic downturn hit many people hard because they didn’t do enough due diligence on this concept. They believed the good times would never end and purchased assets where the cash flow generated to support the purchase price was unjustified. When Covid-19 occurred, the Bank of Canada and all federal reserve banks deployed a large amount of credit into the economy. This massive injection of credit helped avoid economic collapse and raised asset prices. In 2022, the Bank of Canada is now attempting to deal with the downside of its policy, which is increased inflation that is dramatically stripping away people’s purchasing power.

To become wealthy or financially independent, you must understand credit and how to utilize it. That means understanding how to maximize it for small items such as credit card hacks to more complex things such as leveraging it to create lasting wealth. The world runs on credit, so don’t fear it but learn how it works and how to utilize it to reach your financial goals and objectives.