FICO to incorporate buy-now-pay-later loans into credit scores

Theoretically, credit should be used for one thing: to make more money. (not less)

However, instead of using it to buy or construct a machine to triple what you can produce in an hour, the average person is using it to delay having to work that hour at all, in exchange for having to work an hour and six minutes sometime later.

At some point, you run out of hours available and the house of cards collapses.

i.e., credit can buy time in the nearly literal sense, you can do an hour's work in half an hour because the money facilitates it, meaning you can now make more money. If instead of investing in work you're spending on play, then you end up with a time deficit.

or, e.g. you can buy 3 franchises in 3 months instead of 3 years (i.e. income from the 1 franchise), trading credit for time to make more money, instead of burning it. It'd have been nice had they taught me this in school.

> Theoretically, credit should be used for one thing: to make more money.

I disagree.

You use credit to buy a car or buy a house when you don't have the cash to buy them up-front.

It's not so you can use them to make money, it's so you can use them to enjoy life.

> At some point, you run out of hours available and the house of cards collapses.

Only if you go too far. The point is to buy things knowing what they'll cost monthly and for how long, and to budget those as part of your monthly expenses. As long as you can always handle those, you will never run out of hours available and it's not a house of cards. Nothing collapses. You pay off your car; you pay off your mortgage.

You seem to be treating this as something black-and-white when it's not. It's an incredibly useful tool when used with budgeting. Not "to make more money" but to have a better life for you and your family for when it matters the most. Nobody wants to wait until the kids have graduated from college to be able to buy their first house.

And even with credit cards -- yes you generally want to be paying them off in full monthly. But if you want to take a vacation a couple months before you could otherwise fully pay for it, it's really nice to have that convenience too. Not to mention covering some expenses for a few months if you lose your job. They're a tool to be used responsibly.

Let’s say you finance $40,000 in auto debt over 5 years. With a low interest rate of 6% paying $6,300 in interest. That’s over 15% of the amount borrowed! Many people have lager rates over longer periods.

Now consider what would happen if you invested that $6,300 for 30 years instead of spent it on interest. You’re losing out on tens of thousands of dollars in total lifetime wealth.

When you borrow money to “enjoy life” it can quickly end up costing 2x what it would if you spent the money outright, even if you borrowed at low rates.

The trick is to borrow $40,000 to buy the car at 6% and keep your $40,000 invested making more than 6%. Even at 7% annually, you’d make $16,102 over five years (1.07⁵ × $40,000). For that matter, at 6.1% annually, you’d make $13,782 (1.061⁵ × $40,000). Heck, even at 5.9%, you’d make $13,277! The reason why you make more even with a lower rate is that you pay less interest each month with the amortising loan!

The trouble is if one borrows that $40,000 to buy a brand-new car (which will lose $16,000 over five years), or if one borrows that $40,000 and doesn’t have or doesn’t invest $40,000, or both. Life’s a lot easier if you already have the money.

Personally borrow and invest over shorter periods of time (less than 10 years) has too high of a risk portfolio for me, especially with a depreciating asset.

What if there is a market downturn, and you’re out not only the decrease in value of your assets but also the interest in your loan. I admit this is down to personal preference and risk tolerance.

Well if you can't survive a downturn and the risk then no you shouldn't do it. But if you can then you should and in the long run you will end up ahead.

While that is fine in the abstract:

Current 5 year CD APYs are 4.2-4.7%, while current new car auto loan APRs are 5.2-6.7%.

There is usually no magic spread to be captured unless you’re willing to take more risk (say, money in equities instead of CDs). Financing a depreciating asset against one that is volatile in the short term (and has seen drawdowns of 20% several times in the last 10 years) is a duration to risk mismatch.

That spread capture argument often is just justification for a bad decision - people don’t in practice use credit as liquidity backed by an investment, they use it as a cash advance to buy more car than they would absent financing.

So now instead of buying a $20k car cash, people will buy a $40k car, increasing their debt load against a depreciating asset.

In general, my theory is… if that small spread from borrowing to buy a depreciating asset makes a significant difference to you financially, you can’t afford that car anyway, and you’re better off buying cheaper.

Sorry to unload a bit… that wasn’t about you, that was about me being triggered by seeing this advice a lot :)