Today consumers in pretty much all age groups, income levels and occupations use consumer credit to help them manage their financial lives. Most of us use credit so routinely, we don’t even give it much thought. To be able to use credit wisely, however, you really must think about its pros and cons.
“There are definite advantages and disadvantages associated with consumer credit,” says Catherine Williams, president of the Consumer Credit Counseling Service of Greater Chicago. “In order to make credit work more effectively in your individual situation, it’s important to understand how they may or may not apply to you.”
Let’s consider the positives of credit first. One definite advantage to using credit is that it allows you to purchase goods and services as you need them, then pay for the purchases with future income. “That’s fine,” says Williams, “if your credit use is part of an overall spending and saving plan that includes the payments you’ll be making over time.”
Many times using credit is the only way people can get the things they want or need–items such as cars or home improvements, which can be expensive. Waiting until you have enough cash saved for these major purchases may not be realistic, especially if they come about unexpectedly.
Should you have to return the merchandise you bought, the process is expedited if you used credit to make the purchase.
Using credit also provides a way for you to handle other unexpected financial difficulties, such as decreased or temporary loss of income due to disability or unemployment. “Consumers who have no cash reserves often turn to credit to help them get through these emergencies,” adds Williams.
“Using a cash advance, for example, may be a better choice for you than borrowing money from a friend or relative. Just remember, no matter whom you borrow the money from, it will have to be paid back at one point. So you should only borrow what you think you will be able to repay comfortably. That applies to anything you use credit for.”
Convenience is another major advantage of using credit. You can shop and travel without having to worry about carrying large amounts of cash when you use credit. You can buy and pay for more than one item at a time and you can purchase by phone.
“When thinking of credit as a convenient cash substitute,” cautions Williams, “don’t use the fact that it is convenient as an easy excuse to buy on impulse. Time your purchases so you won’t put a strain on present or future income. Also, don’t lose sight of the fact that credit is only a temporary substitute for cash.”
There are some issues associated with the use of credit that, by some, might be considered disadvantages. One of which is that because credit purchases are paid for with future income, using too much credit can cause you to become less flexible with that future income.
“The theory here,” says Williams, “would be as you purchase with credit, you’re committing a portion of your future income to pay for today’s purchases. In the meantime, costs of everyday living will increase and if your income doesn’t keep pace with the rising costs, you’ll have less flexibility with your future income. That may affect your ability to repay your credit obligations.”
That’s why, as you purchase with credit, it’s a good idea to think about whether what you’re buying will have lasting value and will increase your personal satisfaction during current and future income periods. It’s also a good idea to try to assess whether your income will increase enough in the future to support your current credit use.
Another fact of using credit is there is a cost that comes with the privilege. Purchases paid for over time will cost you more than if you paid for them upfront.
“Before making credit purchases, it’s important to decide if what you’re buying is worth the extra cost. If not, you can either buy it on credit and pay for it in full when you get the bill or wait until you have enough cash saved to make the purchase.”
One other thing to remember is if you don’t, or are not able, to pay for your credit purchases as you originally agreed, you risk losing what you bought. This pertains mainly to credit used that requires some type of collateral (a car or a house, for example).
Once you fully understand the pros and cons of using credit, you can better evaluate them in terms of your personal financial situation.
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Terry Ruffolo is the marketing director of the Consumer Credit Counseling Service of Greater Chicago, a non-profit community service organization that provides consumer credit counseling and credit education.
