Everyone makes use of consumer credit. You may say that you don’t have any credit cards or bank loans, but you’re still not completely credit-free. That is unless you’re living on an isolated and remote island without any electricity and other utilities.
As long as you’re receiving services and goods in advance of paying for them – like in the case of basic utilities such as water, electricity, and internet – then you have credit. When you use these services before paying the bill, it’s just the same as using credit cards to pay for purchases that you will enjoy today and pay for at a later date.
Read on to discover if credit is suitable for you by understanding its various benefits and drawbacks.
Advantages of Consumer Credit
Only you have control over your spending habits and whether or not to use credit. Still, there are many advantages to using credit, such as:
Financial and Spending Flexibility
The most significant benefit of using credit is that it provides you with much flexibility in your spending. Making large purchases was difficult before people had access to bank loans, credit cards, and other financial services options. Unless you save enough money to pay for an expensive item – which could take years – it’s nearly impossible to do so on a whim.
Suddenly needing money for emergency car repairs or pharmaceuticals and hospital bills could be challenging. Today, credit provides people with the opportunity to pay for sudden major expenses while offering deferred payment schemes that can spread out over several months or even years.
This flexibility can work in your favor in most cases. However, you should still weigh the benefits and interests.
Rewards and Perks
Credit can provide significant value to people if used sensibly. Many major retailers and car dealers offer reasonable payment plans to their buyers, such as low-interest rates and pay later schemes. Credit cardholders also enjoy reward points, cashback, and frequent flyer miles.
These rewards and perks can be fantastic for you if you have the willpower to avoid the urge to overspend every month and pay off the total amount due for each bill. But if you simply pay the minimum amount due each month, you’ll incur finance charges and end up paying for more than the perks’ worth.
Aside from being more convenient than always having to carry cash around, it also helps you establish your credit history. Plus, most credit card providers collaborate with department stores and other retail shops, giving you early or exclusive access to sale events. Moreover, you can easily buy an item you really want with credit even if you don’t have available cash.
Disadvantages of Consumer Credit
You should base your decision on your employment and other means rather than on what you want to buy right now. Understanding the drawbacks can help:
Penalties and Interest
Credit interest rates are frequently exorbitant, forcing people to repay the actual value of the item bought several times. In 2014, the average annual interest rate in the United States for credit cards was 21%. Instead of paying your credit card purchase over two years, you might want to pay it off to avoid staggeringly high-interest rates.
Having easy access to credit allows consumers to afford basic necessities and more. However, it also makes it easier to purchase luxurious items that you otherwise live without. It can become a habit, and you may end up overspending month after month.
While it’s only natural for people to have impulsive buying urges, it can often lead to credit misuse. Compared to paying cash for purchases, having access to a credit card increases the likelihood of shoppers spending more money on what they want instead of what they only need.
Overspending can trap you in high-interest debt, which can lead to overwhelming payment amounts, lender liability, and even bankruptcy over the years.
Spend Wisely To Enjoy the Benefits
You can use consumer credit to buy goods right away and pay for them later – providing you with spending flexibility and even rewards and luxurious perks. Still, be careful because it can tempt you to spend too much to the point that it’s already way beyond your means. If you need help, advisors such as neutral Noah Hanft can assist you on your journey to a better financial situation.