Why Should You Know the Advantages and Disadvantages of Credit?

Why Should You Know the Advantages and Disadvantages of Credit?

The advantages and disadvantages of credit are often not given proper consideration before applying for credit.

We live in times where people are looking for instant gratification. People aren’t willing to wait for something. When they want something, they want it now, with instant results.

Many people end battle to become successful in their finances or even end up in trouble, due to a lack of knowledge and poor planning.

It is crucial to know the advantages and disadvantages before applying for credit.

There are mainly 4 ways in which you can use your money. Each of these ways has their own advantages and disadvantages. These are (1) paying cash, (2) credit card, charge account, revolving credit or (3) installment credit.

Let us look at these ways individually:

Advantages and Disadvantages of Paying Cash 

These days, just about anything can be bought on credit. It is almost taken for granted that items such as houses and vehicles will always be bought on credit. Anything from houses all the way down to day-to-day items such as clothing and fuel can be bought on credit today.

Yet, there are people out there who even buy items such as vehicles and houses with cash.

Let’s look at some of the advantages and disadvantages of paying cash:

6 Advantages of Paying Cash

  1. The buyer takes immediate possession of goods and becomes the legal owner.buying cash
  2. The price is paid in full at the time of purchase and there is no concern about outstanding debt or payments that can fall into arrears.
  3. Your purchasing power is always intact and is based on your own budget.
  4. There are no binding contracts involved.
  5. It saves you money as there is no interest or finance charge added to the purchase price.
  6. More control over how one prefers to save and spend. You have to wait until you have the required amount for the purchase, but you won’t be exposed to fluctuating interest rates. And during those months when there are unexpected emergencies, you are not bound by monthly repayments.

3 Disadvantages of Paying Cash

  1. In some cases, you may experience difficulty if you need to return or exchange merchandise. Some merchants still appreciate cash buyers, but today many merchants prefer to sell on credit because it makes it easy for the consumer to spend his money (instant gratification). Credit also gives them a better hold on the customer.
  2. There is the possibility of inferior after-sales service because the merchant can feel he that might not make any more money from you and thus be less interested in your problem.
  3. Believe it or not, but always buying cash can have a negative effect on your credit rating. When the time arrives and you have to apply for credit, you will have no credit history to show. This will make it more difficult to qualify for obtaining credit because they cannot find any records of how you handle your finances (credit). It simply comes down to this; you need to be in debt to get credit.

It may Serve You Well to Investigate the Advantages and Disadvantages of Paying Cash

People often feel the urge for instant gratification, but it might be time well spent to look at the benefits of paying cash in many cases.

Paying cash has its benefits. Click To Tweet

It is not important to say “there are 6 advantages and only 3 disadvantages to paying cash”. You need to compare the advantages and disadvantages and determine which are more important to you. Determine which will have the biggest impact on you personally.

Advantages and Disadvantages of Credit

Credit can have its advantages, but we have to be careful about how we use it. It is easy to fall into the temptation of using credit purely for the sake of instant gratification.

Lack of discipline and poor planning can lead to disaster. One of the best ways to avoid getting into trouble is to develop the habit of working on a budget.

4 Advantages of Buying on Credit

  1. In some cases it allows you to take ownership of goods or services even though you don’t immediately have the cash to pay for it in full.
  2. It can give you the ability to leverage your money by investing in income producing investments or assets such as property. But be careful with this one. An investment can only be considered an asset when it produces income. For example, the mortgage of the house you live in is a liability until you have paid it in full because it is not producing income. Be sure to be well educated in financial planning before you start using credit to leverage the power of your money. A lack of knowledge and experience can cause you to learn very expensive lessons.
  3. Credit cards, charge accounts, clothing accounts etc., can be very convenient because you don’t have to carry large amounts of cash with you.
  4. Some people might see credit as a forced way of saving. It is easier to be forced to make a forced payment on a vehicle than to have the discipline to save a monthly amount before buying the vehicle.

4 Disadvantages of Buying on Credit

  1. The temptation to buy more (or bigger) than you need, because it is easy.
  2. Often people would make fewer comparisons, buying more impulsively.
  3. The cost of credit makes it more expensive than buying cash.
  4. If you are not well disciplined and operating on a budget, your monthly installments to pay for credit can get out of control. It can prevent you from being able to save for future your future or from making provision for emergency expenses.

Advantages and Disadvantages of Credit Cards, Charge Accounts or Revolving Credit

Credit cards, charge accounts or revolving credit, enables us to apply for credit once but to have access to the credit again as we pay off the balance. For example; you qualify for credit for the amount of $10 000.00.

You use $2000.00. That means you still have $8000.00 worth of credit to use. But, if you repay $1000.00, you will have access again to $9000.00, etc.

9 Advantages of Credit Cards, Charge Accounts, and Revolving Credit

  1. No down payment or deposit is required.advantages and disadvantages of credit
  2. Once your application for credit has been approved, you have access to the funds. Yet, you only have to make the purchase at your own convenience and it is not necessarily limited to a specific item. The repayment schedule will vary, depending on the type of credit – whether it is a credit card, a clothing account, revolving credit, etc.
  3. Payments can be flexible, normally based on a minimum monthly payment.
  4. In the case of revolving credit, the agreement will stipulate the limit (maximum amount) to which the consumer can charge or borrow at any given time.
  5. Normally, in the case of credit cards, no interest is charged if the account is paid within a stipulated time.
  6. It is convenient if used wisely. No need to carry large amounts of cash with you.
  7. No need to apply for new credit every time.
  8. You take immediate possession and ownership of items bought.
  9. Normally, merchandise bought in this way can be returned or exchanged easily.
  10. Servicing of merchandise shouldn’t be a problem, especially for “preferred customers”.

3 Disadvantages of Credit Cards, Charge Accounts, and Revolving Credit

  1. It can become expensive due to high interest being charged when balances aren’t paid within the stipulated time.
  2. If you can’t make payments, you can be sued. You will have to pay the outstanding balance as well as any legal expenses.
  3. You need to be disciplined because impulsive spending (just because you have the credit available) can get you into lots of trouble.

Credit Cards Has Become Indispensable

In today’s economy credit cards have almost become as indispensable as cash. It is more convenient and eliminates the risk involved when you have to carry large amounts of cash with you.

Yet, it has dangers of its own. Read this article for more advantages and disadvantages of credit cards and credit card consolidation/counseling.

Advantages and Disadvantages of Installment Credit

Installment credit is normally for the purpose of buying a specific item. Installments are predetermined over a specific period of time. These payments are made at regular intervals (weekly or monthly) over specified periods of 12, 24, and 36 months or longer.

In the case of vehicle financing, it can be up to 72 months.

2 Advantage of Installment Credit

  1. It can be used to purchase expensive items such as furniture, appliances, vehicles, etc. for which you don’t have the cashadvantages and disadvantages of credit readily available. You can have the luxury and joy of immediate possession and luxury of the goods or item.
  2. Servicing of merchandise is usually easy obtained.

6 Disadvantages of Installment Credit

  1. A down payment is usually required.
  2. A binding, closed-end sales contract is signed. If you fail to comply with any of the points in the contract – such as defaulting on payments, it can lead to repossession of the goods or item. in such an event, the merchandise will be repossessed and auctioned off if you can’t make the needed payment. When the item has been sold on auction, and they couldn’t get enough money to settle your contract, you will still have to pay the balance of the contract out of your pocket. You will also be responsible for any legal fees and/or court costs. If you cannot afford to cover these costs, the creditor may sue you and you can be at risk of having more of your assets attached.
  3. Although you take immediate possession of the goods, the seller (or in the case of vehicles – the bank), retains the title to the product/item and remains the legal owner until you make the final payment.
  4. Finances charges and interest can be expensive.
  5. Merchandise cannot be returned or exchanged and contracts cannot be canceled. in the case of vehicles, it is normal practice to do “trade-ins” though. But in this case, part of the deal is to settle the outstanding amount on the existing contract, and the buyer immediately enters into a new binding contract.
  6. It binds you to a monthly expense, and without proper planning, it can limit your monthly cash-flow.
  7. It can prevent you from following a healthy savings plan or from having emergency cash.

It Is Your Choice, Choose Wisely

The choice is not only between paying cash or applying for credit. If you want to use credit, you also need to choose which type of credit you need to use.

Pay cash or use credit; it's your choice, choose wisely. Click To Tweet

Whatever choice you make, it is always wise to educate yourself on the topic of finances before making any decision. It will enable you to make well-informed and responsible choices which will fit well within your budget.

Recommended Reading

Here is some recommended reading if you need to learn more about managing your finances and getting out of debt. The following books received good reviews on Amazon.

The Total Money Makeover. This # 1 best-selling book from America’s favorite finance coach, will put you on the road to financial fitness.

Debt Destroyer is the book to read if you stress when you think about money and if you are worried about paying back your debt.

 

One Response to Why Should You Know the Advantages and Disadvantages of Credit?

  1. Hey Jacob,
    It’s always great to land on your blog, it always gives some kind of lessons of life.
    This time advantages and disadvantage of credits, well described and meant a lot..
    Thanks for sharing all the experiences. Would love to visit you blog again and again…

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