Leveraging credit can provide numerous advantages, making it a valuable strategy for anyone seeking financial growth. A high credit score gives you access to lower interest rates, resulting in long-term savings on loans. Additionally, borrowing money can boost your credit score and increase your eligibility for larger loans. Whether you want to improve your financial status or build wealth, mastering the art of leveraging credit can bring significant benefits.
- Credit gives you access to money now to purchase goods and services and pay later on. When used strategically, you can leverage credit for effective wealth creation.
- The stronger your credit history, the more financial tools you can access to generate wealth.
- There are different ways to leverage credit to your advantage, including using credit cards, purchasing properties, and finding angel investors.
Credit is the ability to borrow money or access goods and services now and pay later. Creditors such as lenders, merchants, and service providers grant credit based on how likely you will repay what you borrowed and any additional charges. They determine your creditworthiness, or how much they should trust you, by checking your credit history, which gets summarized in credit reports compiled by the three main credit bureaus – Experian, TransUnion, and Equifax.
Banks, credit card issuers, and credit unions usually voluntarily report your data to the credit bureaus, which then gets used to calculate your credit score. Your credit reports include information about:
- How many credit cards you have open, their borrowing limits, and any outstanding balances
- The amounts of loans you have taken out and how much you have paid down
- If you pay your monthly payments on time or not (late or missed)
- Any financial setbacks, such as foreclosures on your mortgage, car repossessions, and bankruptcies
Your credit score breaks down all this information in a way that is easy to interpret and minimizes bias. It gets calculated by factoring in your payment history, credit utilization, length of credit history, credit mix, and new credit. In other words, creditors are paying close attention to:
- Whether you pay all your bills on time (payment history)
- How much credit you use compared to your total available credit (credit utilization)
- The average age of your credit cards (length of credit history)
- How many different types of credit you are managing (credit mix)
- How often you apply for loans (new credit)
Good Debt vs. Bad Debt
When using credit, there is good debt and bad debt. Good debt helps you generate income and increase your net worth in the future, while bad debt generally gets used towards depreciating assets or consumption.
For example, if you have a lot of credit card debt from buying a sports car for fun or only buying name-brand goods, that is considered bad debt because these goods often lose value the second you walk out the door. On the other hand, if you purchase a rental property in a highly-populated area and take out a mortgage for it, that property will appreciate over time, and you can generate passive income.
Use Your Leverage
When you have a good credit score, you are more likely to get better terms and conditions when applying for credit, such as higher credit lines, lower APRs, faster approval times, and access to more financial tools. If you have a credit score of 750 or above, you have very good credit. If you have a score of 800 or higher, you have excellent credit and are considered “super-prime,” meaning you get the top-notch lending terms and special treatment.
Leveraging credit to access additional benefits work best for people who fall under these 2 categories. Before you leverage credit, make sure you have all the basics covered and full control over your finances. Otherwise, you could end up with more debt than you can afford to pay off.
8 Ways to Leverage Credit
Credit can be an incredibly powerful tool to build wealth and grow your net worth. Let’s take a look at 8 ways to leverage credit and reap its benefits.
1. Take Advantage of Credit Cards
For the past several years, I have made nearly all my purchases using my credit cards, earning thousands of dollars of cashback and rewards in the process. If you leverage credit cards wisely, they can be a great source to build your credit history and get paid for your everyday expenses.
However, before you dive in, make sure you have the means to repay your balances at the end of every billing cycle to avoid paying interest and hurting your credit. While I make most of my daily purchases using credit, I pay off all my balances at the end of the billing cycle and rarely carry debt over to the next cycle.
Maximize Welcome Bonuses
Many credit cards offer fairly lucrative welcome bonuses to new cardholders to entice them to apply. For example, when I received the Chase Freedom Flex, I earned a $200 welcome bonus for spending $500 within 3 months of opening the card. Other cards, such as the Chase Sapphire Reserve, American Express Gold Card, or Capital One Venture Rewards Credit Card, offer several hundred dollars in sign-up bonuses after meeting the minimum spending requirement.
Before you apply, make sure you have the means to meet the minimum spending requirement and pay off the balance. Depending on your monthly expenses, you may need to plan ahead to figure out how to maximize the welcome bonus. A few years ago, I applied for a new credit card right before I studied abroad. Because I anticipated some of my travel expenses in advance, I was able to save money ahead of time to ensure I could pay off my balance.
For most cards, you will get the highest redemption value when you use your rewards towards travel expenses, such as hotels and flights, rather than converting them to cash to pay off your bills. If you are planning vacations in the future, you can save up your miles and points from a travel credit card or other cashback card to pay for all your travel expenses and pocket the money you would have spent otherwise.
Use Your Credit Cards For Cash Flow
Using your credit card to pay for your day-to-day expenses, such as groceries, subscription services, utilities, and gas, is a great way to create a cash flow system. By using credit instead of your debit card, you can have money in your account in the meantime while increasing your credit score and developing good spending habits.
Keep track of how much you are spending and set aside enough money in your bank to pay off your balances. If you have trouble remembering to pay your bills on time, set up automatic payments. Many banks offer automatic payment options – all you need to do is link your account and confirm the payment dates.
Types of Card to Apply For
Not all credit cards are created equal. Different credit cards serve various purposes. Depending on your spending habits and needs, certain cards may be more suitable for you than others.
Cash Back Credit Cards
Cash back credit cards are a great way to create additional income streams and boost your bottom line. These cards typically offer a percentage of cash back for certain purchases you make using the card.
Take a look at your monthly budget and identify which areas you are spending the most money on. For example, if you spend the most on groceries, dining out, and gas, look for cards that reward you for those expenses and use your credit card to pay for those expenses.
Depending on which cards you apply for, you could earn up to 5-6% cashback on select purchases. If you opt for a brand-loyalty travel credit card with a specific airline or hotel, you could earn free flights or stays and upgraded airline or hotel status (think waived baggage fees, free WiFi, lounge access, etc.). While you should not go into debt for these perks, if you swipe your card for expenses you already planned ahead of time, you can boost your credit score and get the benefits.
Let’s say you have the Citi Double Cash Card, which offers a flat 2% cash back for each dollar you spend. If you regularly charge $3,000 a month to the card on your daily expenses and pay off your balance on time every month, you will earn $720 in cash back in a year!
Retailer Credit Cards
If you have favorite retail stores, sign up for a credit card at their checkout counter or online. For example, if you go to Costco every weekend or spend tons of money on Apple products and services, why not apply for their card to get cashback? It is easy money for purchases you are already making.
Balance Transfer Credit Cards
If you are carrying balances on your credit cards and cannot afford to pay them off, apply for 0% APR credit cards. Once you transfer your balances to the new card, you do not have to pay interest during the introductory period, which is usually 6-18 months. However, this is not a sign to increase your spending because you have credit at no extra charge. Use the time wisely to pay off your existing debt instead.
Always Pick Up The Check
If you are going out with friends and family, always offer to pick up the check and ask them to pay you back through cash, Venmo, or Zelle. When I was in college, I used to fight over the bill with friends at restaurants to get the cashback on dining.
Or, if you have a friend or family member who does not have a credit card and needs to make a big purchase soon, offer up your card with the caveat that they need to pay you back as soon as possible. Not everyone uses credit cards, so this may buy them some time to get the money to cover the purchase while you get the valuable rewards.
Invest Your Rewards
Use the welcome bonuses and cashback to invest in stocks, crypto, or other financial assets. If you think of these rewards like free money, you will not feel like you are losing on disposable income. Instead, you can make your money work for you. If you open a brokerage account and deposit that extra money into an index fund like VOO or SPY, you could be looking at 7% annual returns.
Alternatively, if you invest in a cryptocurrency like Bitcoin, you could be looking at exponential returns!
2. Review Your Credit Reports
Your credit history is a big factor in a lender’s decision to approve or deny your loan applications. So, check your credit reports regularly to verify all the information is accurate and up to date. You can check your reports for free at AnnualCreditReport.com or use third-party platforms like Credit Karma or Mint.
Dispute Inaccurate or Negative Information
If you see any information on your report that is inaccurate or fraudulent, dispute the errors with the creditors or credit bureaus. For example, if you see a hard inquiry you do not recognize, submit a claim with additional details and context. Or, if you see a credit card that you do not recall opening, report that immediately.
These errors and fraudulent activities can seriously damage your credit score and affect the types of financial products you qualify for. So, whenever you spot them, get them removed as soon as possible. Once the creditors or credit bureaus verify your claim for accuracy, the errors will get taken out, and your credit score should go up.
3. Re-evaluate Your Insurance Premiums
Your insurer charges a premium when you sign up for an insurance policy, whether for healthcare, auto, home, or life insurance. This premium is the amount you have to pay for the policy, which can vary depending on your age, type of coverage, where you live, any claims previously filed, and moral hazard and adverse selection.
Your credit score also plays a role in the amount you have to pay in premiums. If your credit has improved significantly since you first purchased your current policies, renegotiate the price with your insurance companies. Before going to your insurance agent, shop around on your own with other insurance companies and look for quotes. If your agent cannot lower your premiums, consider taking your business elsewhere. Companies typically offer lower premiums for new customers who have high credit scores.
4. Refinance Your Loans
The same concept applies to loans. Shop around and familiarize yourself with the current rates that consumers with high credit scores get. All lenders want high-quality borrowers, so if you have strong credit or have improved your credit since you first took out your loans, lenders will be more likely to put in the work to keep you as a customer.
Auto loan rates can vary widely from 0-20%. But, depending on the type of car you buy and the loans available, you should be able to get 0-5% APR in the current market if you have good credit. If you have a credit score above 750 and are paying 10% or more in interest on your auto loan, you are essentially giving away your hard-earned money every month. By refinancing, you can cut down your interest significantly.
Take some time to re-evaluate your current relationship with your auto lender and look for potential loans that give you a better deal. By negotiating favorable terms on your loans, you can translate your high credit score into more money available for other financial goals.
Alternatively, if you are applying for an auto loan for the first time, try to get no-interest deals. If you have a solid credit history and stable income, a car dealership may be willing to lend you money at 0%, meaning you can take out the loan and pay monthly installments interest-free.
Refinancing your student loans can save you thousands of dollars over the life of your loan and make it much easier for you to repay your debt. If you have already refinanced your student loans once, you may be wondering if you can do it again to save even more money. The answer is yes – there is no limit to how many times you can refinance!
For example, let’s say you have $50,000 in student loans at 8% interest with ten years left to repay your debt. If we use a simple student loan calculator to calculate the balance, your estimated repayment would be $606.64 per month, with $22,796.56 in interest for a total payment of $72,796.65.
If you refinanced and qualified for a 10-year loan at 4% interest, you would save more than $10,000. That is a huge difference!
When you refinance the mortgage loan on your house, you effectively trade-in your current loan for a new one, typically with a new principal and interest rate. There are several reasons why people refinance their homes:
- Adjust loan terms – Many people refinance to shorten the term of their loan and pay less interest. For example, if you have a 30-year loan, you may want to refinance to a 15-year loan to lower your interest rate and pay less interest over time. Alternatively, you may want to lengthen your term to make lower monthly payments.
- Lower interest rates – If the rates in the current market are more favorable than when you first got your loan, you may want to refinance to take advantage of the lower rates. If you get a lower interest rate, that can lower your monthly payments and the amount of interest you pay over the loan term.
- Change the loan type – If you started with an adjustable-rate mortgage (ARM) but want to get a fixed mortgage while interest rates are low, you may want to refinance. Or, if you started with an FHA and do not want to pay the annual insurance premium anymore, you can refinance to a conventional loan.
- Cash-out equity – With a cash-out refinance, you can borrow more than the amount you owe on your house at low-interest rates and pocket the difference in cash. For example, if your home’s value has increased a lot in the last few years, you may have enough equity to cash out for expenses such as home renovations or debt consolidation. Note that a cash-out refinance may have tax implications depending on how you spend the money.
5. Purchase Properties
Purchasing properties is a tried and true strategy to leverage credit to acquire assets that appreciate over time and build wealth.
Become a Homeowner
There are many benefits to becoming a homeowner. If you buy a home and live in it, you can lock in low-interest, fixed-rate mortgage loans for 15, 20, or 30 years. As you pay down your mortgage every month, you are building equity while your house appreciates over time.
Your monthly payment consists of four factors: (1) principal, (2) interest, (3) taxes, (4) insurance. The interest and taxes are both tax-deductible, while your insurance company may have ways to lower your insurance rates through incentives such as added insulation and energy upgrades. While you may have more upfront costs, such as a down payment or closing costs, it is much cheaper to buy a home than to rent in most markets in the U.S. over time.
Once you pay off the house, it is yours to own. By then, its value will likely have appreciated significantly. If you want to downsize in the future, you can either sell the home at a much higher price or rent it out and use the extra income to travel, retire comfortably, or work on other projects.
Purchase Investment Properties
Buying investment properties can provide additional cash flow that you can use to earn money and generate wealth. It is also a great way to increase your credit score and open up more opportunities for you in the future.
If you are new to the investment property business, do some research on how to purchase investment properties and the markets available. You can buy books on real estate, join a real estate group, listen to financial investment podcasts, etc., to get started. When you look for properties, make sure to look for areas where there is a high demand for rental properties and sustainable capital growth.
Home Equity Line of Credit (HELOC)
If you have a good grasp on your finances, open a home equity line of credit for emergencies. With this line of credit, you can supplement your emergency fund for free and have it available whenever you’d like for any unexpected expenses.
A HELOC comes with a credit limit based on and secured by the equity you have in your home. Typically, you can borrow 60-85% of the current assessed value of your home minus the amount you owe on your mortgage. You only make payments when you borrow against this line of credit. And, after a certain amount of time passes (typically 10 years), your HELOC enters a repayment period, and any remaining balance gets converted to an installment loan.
Note that a HELOC is not the same as a home equity loan. While a HELOC is a revolving line of credit, a home equity loan is always an installment loan, similar to an auto or student loan. That means you will pay a set monthly payment and interest rate over a set number of months or years.
Upgrade Your Property
If you plan to sell your home soon, but it needs some work before it is ready to go out into the market, use your credit card to pay for any repairs or renovations. Making simple upgrades like cleaning and decluttering, home staging, and landscaping can dramatically increase the value of your home.
6. Invest in Yourself
While you may not be directly improving your wealth, using your credit card or other forms of credit to invest in your future can make a huge difference. For example, if you are currently employed and would benefit from attaining more formal qualifications, which will result in a pay raise, then this is for you. Use your available credit to purchase training courses or materials and upskill yourself as much as possible.
Pay For a Course That Can Boost Your Salary
If you feel stuck in your current role or feel like you are not qualified for a promotion, look into classes or bootcamps that can accelerate your career. In my free time, I am taking courses, such as this web development bootcamp, to learn how to code. While I do not have plans to be a developer, I want to open myself up for more career growth opportunities in the future by challenging myself to skill up.
Several friends have also completed coding or data science bootcamps, which could cost upwards of $10,000-$20,000. While this may seem like a huge upfront cost, many of these programs offer scholarships, loans, and payment plans. And the average salary of a software engineer in the U.S. is ~$107,137, while the average salary of a data scientist is $126,543, according to Glassdoor (as of April 2023). So, you will more than make up the costs down the line.
Start a Business
Are there things you love to do and wish you could make money off your passion projects? If so, do your research on how to start a business in that industry and take small steps to plan out the process and get a feel for what it is like to run a business.
If you have a strong entrepreneurial spirit and are confident that you can generate a steady revenue stream, consider opening a credit card with 0% APR to fund your business at no extra cost for the duration of the promotion. Additionally, you can write off business expenses, such as ads, education and training, rent, and travel, and get tax deductions for them.
7. Use Business Credit
Like credit cards for consumers, business credit allows companies to borrow money to purchase goods and services. For business owners, having a corporation or limited liability company provides the opportunity to create a business credit profile. This profile then gets used by credit grantors to evaluate whether they should extend credit to a business or not.
Before you can establish business credit, you need to structure your company as a separate legal identity and apply for a tax identification number (employer identification number) for tax filing and reporting purposes. Once your business is properly formed and operating, you can apply for credit in your company’s name.
The 3 main bureaus who monitor business credit are:
- Experian Business
- Equifax Business
- Dun and Bradstreet (D&B)
Similar to your personal credit score, your business will have varying scores from each bureau, so check these reports regularly. Having good business credit is a fundamental part of your company’s ability to leverage credit.
Additionally, you should network and build rapport and relationships with the right people to obtain substantial lines of credit. If you want to work with well-matched banks and lenders for your business, you need to build a professional network. By maintaining close relationships with decision-makers and earning their trust, you can quickly adapt to changes in financial programs and exchange favors down the line.
8. Find Angel Investors
If you want to start a business, consider seeking angel funding to raise money. Angel investors are affluent individuals who put money directly into early-stage startups, typically in exchange for convertible debt or ownership equity. They usually have full-time jobs, so they will usually not be involved with the company or ask for a board seat. Instead, they want to bring a product or service to the market and invest in the business long-term.
Angel Investing Process
There are several steps involved in raising money from angel investors:
- Vet the investor. Once you find people willing to invest in your business, research their background to verify their reputation and experiences working with startups.
- Discuss your business plan. Prospective angel investors will want to evaluate your business plan to make sure it meets their investment expectations. That includes reviewing your product or service offerings, financial statements, the opportunity, team, etc.
- Negotiate terms. Once both parties have done their research, you and the angel investors can agree on a term sheet, which lists out the terms and conditions.
- Secure the money. Once you sign the term sheet, the angel investors will chip in the agreed amount.
Finding Angel Investors
If you do not know where to start, there are several options you can try out. Look for angel organizations, such as Angel Capital Association or Angel Investment Network. Contact your local chamber of commerce to see if they can connect you with local angel investors. Attend networking events or ask professionals you regularly keep in touch with to invest in your business. Check out entrepreneurship programs at local universities or colleges.
The Bottom Line
When you leverage credit strategically, you can build wealth and dramatically increase your net worth in the future. But the key is to develop healthy spending habits, live within your means, maintain good credit, and build a strong professional network.