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Consumer Credit Explained

By Edited Nov 13, 2013 0 0

Credit is a very simple concept. It is an arrangement to receive cash, goods or services now but pay for them in the future. Simple but very very powerful. This article will cover the topic of consumer credit which is essentially credit but used for personal needs. All of us use credit in our daily lives. How many times have you heard: "Charge It!" or "Put it on my account" or "I'll put it on my card". Each phrase is synonymous with the use of personal credit. Each time you use credit you are getting instant satisfaction for which you will have to pay for in the future. It seems harmless enough, but the amount of credit you use can grow large quickly and because it reduces the amount of future income you will have the effects can be significant if not devastating to your financial future. This article will discuss the uses and misuses of credit.

Valid reasons for using credit could include such things as emergency medical expenses, purchasing an item now that will cost more in the future or borrowing for educational purposes.

The misuse of credit could include buying a sports car when your budget allows for a sedan or using a credit to pay for goods you want that you simply do not have the available funds for.

Consumer Credit Explained

Credit can be very tempting and hard to manage. Statements often only come once a month and it is always amazing how quickly those charges to credit can add up.

It isn't always clear when making a major purchase on credit whether it's a reasonable decision or not. Consider asking yourself the following questions before pulling out the credit card:
  1. Do I have the cash for a down payment? (If applicable)
  2. Do I want to use savings for this purchase?
  3. Does the purchase fit my budget?
  4. Could I use the credit for this purchase in a better way?
  5. Could I postpone the purchase?
If you answer these questions honestly it will be clear whether or not the purchase is a wise decision or not.

There is a cost to credit and many people do not accommodate for this in their budget. That cost is interest. Most major credit card companies offer a grace period where interest is not charge, but once the grace period has passed - which is typically 21 days - the interest costs can add up quickly. If you are using future income to pay for credit and also paying interest it can become very difficult to rid yourself of the debt.

It is recommended to use credit wisely and pay for all purchases made before the grace period has lapsed. Double check your statements and understand how much you are paying for the privilege of using that credit.

There are advantages of credit the main one being the ability to enjoy purchases now and pay for them later. Some credit users feel that goods purchased with credit are easier to return and loyal credit users may be sent special promotions in the mail. Lastly using credit is convenient.

The most important thing to understand is that credit is a privilege and should be used carefully. Try to pay for your purchases in the same month they are bought and always track your purchases so that you do not get a surprise bill in the mail and become overextended financially.



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