Credit cards can put the brake on your wealth creation plans

Having too many credit cards can seriously limit your ability to build wealth for the future. At Christmas time in particular, we have to be extra careful not to give into the temptation of easy credit.

Christmas Credit and Crushing Debt Hang-overs

45 percent of Australians are planning to pay for Christmas with their credit cards this year. That’s the result of a survey conducted by card comparison site:

We all know about the damage a Christmas credit binge can do to our finances. If we don’t keep a tight rein on our spending through the holiday season, we can dig ourselves into a hole that can take months or even years to get out of.

There are certainly things we can do to manage our credit better, such as avoiding taking out short-term loans, which attract high interest charges, or shopping around to find the best credit card for our circumstances. Too often we let ourselves get a bit lazy, and use the financial institutions that we (or our parents!) already have a relationship with.

And we can also be extra careful not to let ourselves be seduced by those credit cards offering special-offer rates. They often stay low through the Christmas period, but ramp up quickly afterwards. This time of year is peak hunting season as far as credit card companies are concerned.

Credit Cards and Long-term Limits on Wealth

But all of this is just tinkering at the edges. If we’re serious about building our wealth over the long-term, then we need to take a good look at our relationship to credit. We need to make sure all aspects of our finances are pulling in the same direction.

The secret to a successful wealth strategy is the intelligent use of leverage. It’s about the clever use of debt to build a portfolio of productive assets – assets that are making money for us.

Obviously, using credit card debt to buy gifts and baubles is not about building a productive asset base. However, even a frugal use of credit cards can limit your leveraging power.

Let me show you what I mean. When you’re trying to access credit from a bank, the first thing they’ll do is look at all of your cards and your credit limits. Say you have three credit cards with limits of $25,000 each.

Now you might use these cards responsibly. You might say you always meet your monthly repayments, and that the cards are only for emergencies. But it doesn’t matter. In the eyes of the bank you have a fully drawn down loan of $75,000.

So when they’re making an assessment of how much debt you can manage, and how much they are willing to lend you, they’ll be factoring in an existing debt on your books of $75,000 – regardless of whether you actually access this credit or not.

So having a bunch of cards you never use actually chews up your borrowing capacity. I don’t think many people realise this. We’ve had clients come to us after a bank knocked back an application for a loan. We worked with them, cut up a couple of credit cards, took it back and got the very same loan approved.

Just by getting rid of a credit card they never used, our client was able to increase their access to credit, and increase their leveraging power. This meant they had greater capacity to build a portfolio of productive assets, and build real wealth for the future.

Take Control this Christmas

Christmas should be a time of joy and celebration, so don’t let it become a source of stress. If you keep within your means, manage your debt selectively and intelligently; you can keep your financial goals on track.

If you’re interested in speaking to one of our consultants, we’d be happy to take a look at your current situation and help you make some proactive decisions about your financial future.  Book your free consultation here.

Have a safe and merry Christmas everyone!

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