Credit in any form comes with pros and cons for consumers and must be handled responsibly for optimal benefits. Credit offers many of us the chance to buy a car or home with financing and mortgage loans or to pay for school or furniture using a credit card or even clothing when we're short on cash but need to expand our wardrobes. Understanding consumer credit advantages and disadvantages will help you avoid potential financial problems.
Employing consumer credit responsibly benefits many people, but irresponsible use of consumer credit leaves behind enormous debt and anxiety. Not only can default on consumer debt hurt the individual, but when many thousands default each year, it raises fees and interest rates for others.
Pro: Purchasing Convenience
Credit is handy for shopping the internet or eliminating the need to carry around large amounts of cash when shopping, renting vehicles or going out for dinner or other forms of entertainment. Accessibility to credit in emergencies, such as when a roof needs repair or the car needs a new transmission, is the only way many individuals can afford such repairs.
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Con: Unmanageable Debt
Unfortunately, borrowing on credit often encourages individuals to spend more than they earn, resulting in debt. A consumer’s care when using credit and ability to pay it off will determine the amount of his debt, which may grow from hundreds to thousands of dollars in a very short amount of time. Forms of debt can include auto loans, a mortgage or home equity loan, student loan and credit card charges.
In addition to the amount of purchases, the amount of interest generated each month can make consumer debt unmanageable. Shopping for low-interest, no-fee cards, paying more than the monthly minimum due and using balance transfers can help reduce interest.
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Con: Finance Charges
Credit means borrowing money that you don't have readily available. Such loans incur finance charges, or the fee that a consumer is charged for the privilege of borrowing that money. Finance or interest charges must be paid first when a person makes a payment on a credit line, while the remaining payment amount goes toward paying down the overall balance.
Finance charges often absorb up to three-quarters of that payment, creating longer payoff times for the borrower. Interest rates are based on the card’s annual percentage rate and a person's payment or credit history. The better the credit history, the better the chance of enjoying a lower interest rate.
Pro: Financial Independence
Consumer credit enables individuals to access funds when needed without having to ask relatives or friends for money. It also keeps them from borrowing from less-than-reputable individuals or companies that charge astronomical interest.
Borrowing from friends and family may cause rifts, disagreements and fallout, so having a credit line with a credit card company or lender helps reduce such situations and keep transactions private. When you don't need to borrow from family or friends due to your having a credit card, you can contact those people in the event of a financial emergency and you will be more likely to get assistance.
Denise Stern is an experienced freelance writer and editor. She has written professionally for more than seven years. Stern regularly provides content for health-related and elder-care websites and has an associate and specialized business degree in health information management and technology.