Credit and Debt are the Ying and Yang of Finance

Some people believe that being able to access a lot of credit is “Kudos” towards their character and financial capability without realizing it is also the bright side to what can quickly become the downside of being financially stable.

If you access a lot of this credit capital you will also be putting yourself into a lot of debt.

For every dollar of credit that you use, you will be in debt repaying that dollar PLUS whatever percentage you borrow it at.

So if you have a good credit rating and are able to borrow a lot of dollars, that also means you have the ability of  putting yourself into a lot of debt above and way beyond that which you have the ability to borrow.

I have heard people brag about the number of credit cards they hold. That is telling me that this person is not financially aware of how to manage their finances in such a way that they are able to maintain a good credit rating but just that they either haven’t used them very much (which is good) but also that they are holding the potential in their wallet to lose this access to financial tools very quickly.

All of us need to be aware that for every dollar we borrow, we will be paying back that dollar plus the extra 3-17% interest it is borrowed at.

So if you are thinking of borrowing money for any reason, it is in your best interest to shop around for the lowest interest rate to make this dollar borrowed more affordable to repay.

When we access credit to buy a house, for example, which is the biggest loan most of us will ever be borrowing, we need to look very closely at what the interest rate is and how long we will have that same interest rate. One of the big problems here in Australia, is that many home owners have borrowed money at the lowest possible interest rate and haven’t locked that rate in for the longest time possible. So when the Reserve Bank of Australia lifts interest rates, these borrowers have their monthly repayments increase.

Australia is not alone with this problem of increasing interest rates. After the recent Global Financial Crisis when our Governments and banks changed the criteria on borrowing money, interest rates were held unrealistically low.  This was not healthy for sustainable financial stability but it did help a lot of people to remain solvent.

We all need to be more aware of the relationship between credit and debt so that the Ying and Yang of good financial management is better understood before we even borrow that first dollar.