Ask CryptoVantage: How to Take Advantage of Debt

Establish a Credit Score

One important aspect of debt is establishing and maintaining your credit score. Loosely speaking, your credit score is your entire credit history condensed into a single number. The number ranges between 300 and 900 and measures your ability to pay back loans.

From a lender’s perspective, it tells them how risky it might be to loan you money. If you’re under the age of 18, then you don’t have a credit score, as you’re not legally eligible to take on debt. The sooner you begin building a solid credit history, the stronger your credit score will be in the future. That is assuming you act responsibly with your debt.

You don’t have to take on a line of credit or a mortgage to build a good credit score. A simple credit card that pays your monthly cell phone bill is sufficient in establishing a baseline for your credit history. Just remember to always make your payments on time.

Missing a payment and allowing your credit card to accrue interest is both bad for your credit score and bad for your pocket book. Once you’ve been taking on and paying bills with your credit card for a few years, your financial institution might offer you a good sized line of credit. This is where the real fun begins.

Debt Arbitrage

One way to put debt to work is to find somewhere else to loan it. Debt arbitrage is best illustrated with an example. Imagine that you were just offered $10,000 at a 5% interest rate.

This means that if you withdrew all $10k, at the end of the year, you will owe the lender $500. If you find someone else to borrow this cash at a higher interest rate, then you can pocket the difference.

Crypto.com, for example, historically was offering between 8% -12% APY on stablecoins. If you loaned that $10k that you borrowed to Crypto.com, and earned 10% APY, then you end up with $1,000 at the end of the year, and you owe $500 to your original lender. At the end of the day, you can pocket and profit with the remaining $500.

This strategy of taking money from one place and putting it in another comes with its risks. You have to trust that whoever you’re lending the money to is going to be able to pay you back when you want the money.

In the above example, if for some reason Crypto.com went bankrupt, and you lost that $10k, you still owe the person who loaned you the $10k in the first place. You’ll be stuck paying down a loan plus interest. There is little recourse for you to get your money back from a bankrupt company. And that’s exactly what happened last year with lenders like Celsius Network, Voyager Invest and BlockFi.

This brings us to the most common way that people take advantage of debt. This next method allows you to maintain a certain amount of control over the money.

Buy a Cash Flow Generating Asset

Perhaps one of the most common ways that debt is used, is to buy a cash flow generating asset. This can be anything from a house or condo, to a business or entrepreneurial venture.

The bottom line is that this asset should be able to generate you some recurring cash flow. The idea is that the cash flow from the asset is enough to pay the interest on the loan. Then ideally, when you want to sell the asset, it has appreciated in value. This is where your profit comes from.

If the cash flow from the asset is larger than the interest you’re paying on the debt, then this is a bonus in some ways. Some people opt to reinvest extra cash flow back into the asset.

An example from real-estate might be renovating the kitchen or bathroom, thus increasing the overall value of the home. This is not only a good way to increase the chances of selling your asset for more in the future, it’s also ethical. Taking good care of assets means that they’ll be in good shape when the next person comes along to buy it. May this be a car, home, land, or business, it is in your and others best interest to take care of, maintain, and even improve the state of the asset.

If you’ve done a good job and are patient, then your reward is a nice sum of money from the sale of the asset in the future.

Debt and Cryptocurrency

Although we didn’t speak much about cryptocurrency in this article, the two are more intricately linked than you might initially think. We’ve written other articles about how to take on debt with cryptocurrency, and whether or not you should. It’s also important to recognize that debt is much more expensive than it was a year ago thanks to governments around the world tightening their fiscal policies. Crypto is an interesting counter-point, however.

In a nutshell, there are no credit scores in the crypto realm. All loans are backed with collateral, meaning that you need to lock up and risk your funds in order to take on debt. In one sense this is a good thing as it means you will never default on your debt. On the other, you’re putting your hard earned cryptocurrency at risk in order to take on some debt.

Regardless of how or if you take on debt, it is good to be aware that it is a possible tool in your toolbelt. Many people have gotten rich playing with debt. Many more still have gotten burned. Remember, debt is playing with fire.