Recently, I ran a poll on Twitter. I wanted to know whether or not folks knew how to buy credit with cash. Most who replied talked about credit cards, but this isn’t about credit cards.
Since most folks understand the game with credit cards, we’ll discuss why I don’t recommend that. After that, we’ll pivot to How to Buy Credit With Cash Without Risk.
Why I Don’t Recommend Credit Card Games
One word: Risk.
We all know that the proper way to use a credit card is to purchase something and then pay it off. Never leave a balance on your credit card at the end of the month. Simple.
Unless its not.
What if you’re a young hustler? It’s easy to say, “I’ll put it on my card for now, I’m sure I’ll have the money to pay it off later.” Sometimes you will, sometimes you won’t.
What if you’re a young Dad? The expenses of running a stable family culture are high. Chances are good that something is going to fall through the cracks.
It’s entirely too easy to set out to do something smart and fail spectacularly. I’m a big advocate of never underestimating yourself, but you shouldn’t overestimate yourself either.
The risk of making a mistake or miscalculation is ever-present.
The only time you should consider keeping a credit card for personal use is when your income can support it. You’ll still have to be smart, but with high income you will have a greater margin of safety.
Keeping all of this in mind, my recommendation for young bucks is still to run their personal finances like a cash business. That does leave you with a problem when you’re a little older, though. You have plenty of cash and no credit.
Here’s what you can do about that.
Before You Buy Credit With Cash, Get Your Mind Right
To understand what I’m about to tell you, you have to understand what you’re doing. It’s the opposite of what you’ve been trained to think.
Most people buy things with credit, then pay for the debt with cash. When you do this, your goal is to buy things with future you’s money. This leaves you with a lot of things and no money.
You’re going to do the opposite.
You’re going to buy credit with cash, then buy assets with credit, and then the assets pay off the debt with more cash. Your goal is to buy things that pay for themselves. This leaves you with more money than when you started.
You will lose cash doing this. You are trading real money for imaginary money. That’s what credit is – imaginary money.
If you don’t have a concrete, plausible plan for turning that imaginary money back into real money, don’t do this. If you don’t already have financial freedom, don’t do this.
Let’s get started.
What You Need To Buy Credit With Cash
All you need is cash you don’t need and discipline. This won’t work if you lack either one.
Determine how much you want to grow your line of credit. For sake of discussion, we’ll pick an easy number. Let’s say you want to buy $1,000 in credit. You want future you’s name to be worth $1,000 more than current you’s name.
You will need, at minimum, $2,000 in cash to start. Take the number you want and double it – that’s how much cash you need. It would be better to have more, but there will be a few variables along the way.
We’ll also assume that you have no credit to start with. You’re a young buck who has never borrowed a dime in his life. You have saved every penny you could and you’re ready to buy some credit.
Step #1 – Buy a CD
A CD is a Certificate of Deposit. You are essentially giving a bank money for a specific period of time. At the end of that time, you get your money back plus interest. It’s like having a savings account with a better interest rate, except you can’t withdraw money whenever you want.
Some folks stagger CDs as a stream of revenue, but at present the return is very low. To get the most out of that strategy, you’d have to invest a large sum of money that could be used on something else. I don’t like it much.
You’re not staggering CDs, though. For this example, you’re getting a $1,000 CD.
Step #2 – Get a Loan For The Same Amount From The Same Institution
Go back later and take out a loan for the same amount as your CD. Use the CD as collateral to get a loan you don’t need.
To the bank, it looks like you thought you didn’t need your $1,000 and then something came up later. There’s no way they won’t do this, because they already have your $1,000 from the CD.
This is a cherry deal for the bank – you’re basically giving them money. They don’t have to do a damn thing but collect it. All you’re interested in is increasing your credit with no risk.
They already have your money, the worst thing that can happen is you default on the loan and they keep the money you already gave them. What they don’t know is that you saved up $2,000 in cash before doing any of this.
You now have $1,000 in cash, another $1,000 from your loan, debt of a $1,000 loan plus interest, and a $1,000 CD.
Step #3 – Pay Your Loan At Least Twice Per Month
You already have the money to pay your loan off – you are using the money from the loan to pay for the loan. The extra $1,000 you saved is to cover the interest on the loan.
If you’ve never borrowed anything before, the interest will be high but won’t likely be higher than the principal amount. That’s why you saved double the amount of your CD to begin with.
Your goal is to pay off that loan before the maturation date of the CD you used as collateral. Pay twice, thrice, whatever it takes to pay off your loan before your CD’s maturation date.
Step #4 – Redeem your CD
You have paid off your loan. You no longer have the $1,000 from the loan, and you no longer have the $1,000 plus interest debt.
Whatever the interest ended up being is what you have spent from your other $1,000. When you redeem your CD, you will regain your initially spent $1,000 plus interest.
If you lost $500 to interest (pulling numbers out of my ass now) on your loan, and made $20 interest on your CD, you end up with $1520. You have bought $1,000 Credit with $480 Cash, all with zero risk.
Concerns When You Buy Credit With Cash
To buy credit with cash without risk, the numbers can’t be substantial. If you have the resources to create $150,000 Credit using this method, you don’t need it.
Just use cash, but don’t be surprised when the audits come. Nobody earns that much money that consistently.
What this method is for is for that first bit of credit. Getting a line of credit going with absolutely no risk whatsoever when you haven’t borrowed a damn thing in the past.
The purpose of all this is avoiding an insane interest rate when you actually need to get a loan. Interest is where you’ll waste a lot of money when you’re just getting started – you’re an unknown factor.
This takes the risk out of the experience and gives lenders a reference point in the future. You’re now proven reliable.
You might wonder what the hierarchy then becomes – what do you do next?
Continue to Buy Credit With Cash
Using this method will build your credit up a bit. Do things to build onto it, while still managing risk.
Buy a car you don’t need but could afford. Use the same system as before.
Save $8,000 then finance a $4,000 car with a $4,000 CD as collateral. You already have the money to buy the car outright if your situation changes, plus interest. If you can afford to do a nicer car, do a nicer car.
If you spend a few years doing things like this, you can build a robust line of credit with minimal risk. That’s only valuable if you’re actually going to do something with it. That part’s for you to come up with.
Don’t attempt this if:
- You lack the discipline to leave the money alone.
- You don’t have money you don’t need.
- Today’s money means anything to you other than buying tomorrow’s freedom.
Do attempt this if:
- You have the cash but not the credit.
- You have a concrete, plausible purpose for the credit you’re trying to build.
- Future You having money matters more to you than Current You living like a playboy.
How to Buy Credit With Cash:
- Buy a CD
- Get a Loan For The Same Amount As Your CD From The Same Institution
- Pay Your Loan At Least Twice Per Month
- Redeem Your CD