Before reading, make sure you’ve read and understand:

Credit 101

and

Establishing Credit

 

People sure do manage to screw themselves with credit and debt, don’t they?  Most mainstream financial gurus decry debt outright and their methods target debt elimination as a primary objective. 

Is having NO debt preferable? YES! But if most of us were asked to chose between being debt-free and not having our dream, or indebted and having a career that is also our passion, most of the readers here will choose the latter.  It’s reasons like this that I started this site to begin with!  However, this is NOT a carte blanche to run up loads of credit card debt; doing that can stop or slow down your dream FAST.  No, we need to learn how to manage our credit and debt effectively and make wise decisions that are the best for our business/dream.

First of all, if you can’t meet your basic living expenses on your current cash flow alone, be VERY careful using credit to make up the difference.  Left to its own devices, this kind of thing sends people unwittingly in bankruptcy every day.  Your dreams will be much better served if you can establish a decent cash flow to at least cover your basic expenses.  For many this comes in the form of a day job, but it can also be something you piece together.  If your dream is to become a country music solo artist, you might be able to generate cash flow as a backup vocalist, wedding singer, church musician, and from various gigs around your local area.  If that’s not enough and you don’t foresee a big break coming soon, consider adding some additional part time work to fill in the gaps. 

Ok, so all that sounds exactly like what anyone else says.  Well, here’s where it gets different, and this part is much more art than science.  IF you can see that your career/dream is beginning to get some real traction, you might want to allow yourself to dip into your credit for a brief period of time if necessary to further your ultimate goals.  For our above example, if our singer gets some opportunity for a gig that doesn’t pay as well as his part time/day job, but offers great connections and exposure, perhaps it would be worth quitting the day job and using some credit to make up the difference in income to see how the new opportunity plays out.  Is it a risk? Absolutely. 

To minimize this risk, we need to limit our credit use to wise purchases that further our objectives, not impulse buys of consumer goods. For Example:

Bad Use of Credit

  • Buying that pair of jeans you just had to have
  • Paying your bar tab
  • Meals out
  • Other random, discretionary consumer spending

Good Uses of Credit

  • Replacing your guitar that got stolen, without which you couldn’t do your gigs or practice
  • Buying meals out or coffee where you’re meeting with colleagues and contacts to advance your business
  • Funding a trip to an audition that you’re well qualified for and might result in a major break

You probably see the pattern here: credit is GOOD when used to further your business.  Even still, used too much can sink you quick, but restricting it’s use to emergencies like those above will help keep that from happening. 

Don’t forget that everything you borrow MUST be paid back eventually.  So, you have to factor this in when making decisions.  Is that audition you want to take REALLY something you have a shot at?  Consider the additional time you’ll have to work to make money to pay it off, and if it still looks like doing the audition is a wise decision and worth the investment, then go for it! 

As time goes on, if you’re not paying things down fast, realize that even those tiny minimum payments can catch up with you FAST.  Five or six of those audition trips and you’re already making $100+ in minimum payments alone!  Multiplied by a few years and you can wind up with $500+ monthly minimum payments, so be very careful. 

This kind debt accumulation of thing often kills businesses much bigger than you are.  Warren Buffett, when talking about good companies to buy, often mentions “a company with low debt” as a prime indicator of a good company.  Every time you hear of a company filing for a Chapter 11 bankruptcy, realize that they’re doing it for the same reason you have to be careful with credit card debt.  The more debt you have, the more it costs just to “service” that debt.  “Service” doesn’t mean pay off, it just means keeping your creditors from suing your artistic tail. 

So to recap, good uses of credit are ones that further your business/dream, whereas bad ones are flippant purchases that have no bearing on what you want to accomplish.  You need to make discretionary purchases out of your cash flow/income, and ideally you’ll want to finance business things straight from cash as well.  Reserve credit for those times when you don’t have the cash on hand and when not making the purchase would actually be harmful to your business.  There are no hard and fast rules to determine when this applies, but in the weeks and months to come, I hope that our discussions here will help you flesh out these answers for yourself and get you that much closer to realizing your dream.