U.S. consumer credit and the economic crisis?
Alexander T. Hoffman 5.11.2009

Today, we use credit to buy almost anything. U.S. families travel, eat and attend college on credit. They charge everything from flowers to gasoline. People don’t even ask themselves about the advantages, disadvantages and costs implied related in buying a credit. It is time to understand what getting a credit means.

Economic crisis and credit crunch

With the current economic crisis, banks are tightening their policies and are more reserved in giving a credit.  That means it is harder for you to get a credit. In the current situation where money is expensive, you have to ask yourself if there is a better way to handle your day-by-day expenses or investments without getting a credit.

Advantages of using a credit

The first advantage of credit is having the possibility to use and enjoy goods and services while paying for them. For major purchases, such as an automobile, a house, a child’s education, or a major home improvement, credit may be the only way a family can handle the large financial obligation. Another advantage of credit is convenience, since it reduces your need to carry large amounts of cash and permits paying several expenses at one time. Other advantages include:

• Delaying payment for some goods and services will give you a greater share of your current income to use for other purposes.
• Installment credit can become a form of budgeting for some persons. It can discipline them to meet certain expenses regularly.
• Credit can be helpful in short-term emergencies, car repairs and medical expenses.
• Credit establishes your credit record.

Disadvantages of using a credit

When using credit, you pay for the privilege of using someone else’s money - a finance charge. Therefore, buying on credit typically costs more than paying cash. Credit ties up future income, providing less freedom in spending future income. A major disadvantage of credit is that it tempts the consumer to overspend, to buy goods and services on impulse, or to lose track of total debt.  Other disadvantages are:

• In using credit, you may not shop around for the best buy and may pay more than necessary.
• The ease of buying and returning merchandise on credit may encourage you to shop less carefully or fail to plan your purchases.

 

Costs involved in using a credit
Getting a credit means borrowing or renting someone else’s money at a given cost. You have to know two basic terms for understanding the cost of a credit. The first one is the total dollar amount you pay to use credit. It includes interest rates and sometimes other additional costs like service charge, credit report, internet banking etc. The second one is the annual percentage rate (APR), the percentage or relative cost of credit on a yearly basis. It is the ratio between your finance charge and the amount of credit actually used during a year.
When should I use a credit?

Whether or not to use credit is a decision that requires careful examination. When used correctly, it can help individuals and families to live more comfortable and satisfying lives. If used incorrectly, it can bury families deeply in debt and result in tremendous financial and emotional stress.

Before buying a credit, look at your total financial picture including current income and expenses as well as future goals. Look at the effect of the monthly payments on your current budget. Before buying anything on credit, ask yourself the following questions:

• Do I need this now?
• How much will I pay for credit
• Can I make the payments?
• Is it worth the extra cost and risk?
• What will I have to give up paying for it?

General guidelines for using credit suggest borrowing only to finance an investment such as a home or education.  Food, clothing, transportation, entertainment and other daily family living expenses should come out of current income.
 
Resources:

• K-State Research and Extension, "Change for Your
  Dollars: Part 3: Your Use of Consumer Credit".
• http://extension.missouri.edu/publications

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