When a person needs money to renovate a house, to buy a car, pay for education or anything that requires an immediate cash outlay, he needs to be able to borrow the money.
People use credit as a financial tool to improve one’s financial situation and as a way to pay for goods and services that cost more than they can afford.
Credit can become a problem if a person is unable to generate enough income to make repayments. This is particularly true for young people, who have not had the time to accumulate the cash required for major purchases and expenditures. The reasons for borrowing are:
1. Consumption
The most important reason why a person may borrow funds is to enjoy earlier consumption of goods and services. Saving the money may take too long and in the meantime, inflation may actually lead to an increase in the price of item he or she intends to buy. Spreading payments over time makes expensive items more affordable and the consumer can use these items immediately, without having to wait till the full payment is made.
The most important reason why a person may borrow funds is to enjoy earlier consumption of goods and services. Saving the money may take too long and in the meantime, inflation may actually lead to an increase in the price of item he or she intends to buy. Spreading payments over time makes expensive items more affordable and the consumer can use these items immediately, without having to wait till the full payment is made.
However, a point to note is that using credit means that a person has to suffer interest cost, which means that borrowing in itself is expensive.
2. Convenience
Another reason is that using Credit, particularly in the form of a credit card, is very convenient. Instead of carrying cash around, a single card will suffice for most payments. Besides, there are other advantages.
Another reason is that using Credit, particularly in the form of a credit card, is very convenient. Instead of carrying cash around, a single card will suffice for most payments. Besides, there are other advantages.
- Credit card companies provide a statement of all purchases and this is a convenient record for use in financial planning.
- Provides protection against loss from theft. Credit card companies usually provide insurance against loss of items purchased using their credit cards.
- Lost credit cards can be replaced easily, unlike cash.
- Facilitates use in Internet e-commerce transactions.
- Ability to return disputed items.
3. Contingency
One reason why a person may want to obtain credit, for example, a bank overdraft, is to have a cash reserve that can be used in an emergency, such as period of unemployment. However, use of credit is not the ideal way to provide for emergencies. Individual should have enough cash/near cash, not credit, to cover between three to six months of expenditure.
One reason why a person may want to obtain credit, for example, a bank overdraft, is to have a cash reserve that can be used in an emergency, such as period of unemployment. However, use of credit is not the ideal way to provide for emergencies. Individual should have enough cash/near cash, not credit, to cover between three to six months of expenditure.
There are many types of credit cards, for example, Rewards Credit Cards, Student Credit Cards, and even 0% Credit Cards, and of course so much more. All borrowed funs carry with it interest cost and this may make borrowing expensive. Unless one is careful about using the different types of credit, it is easy to fall into the trap of over-spending without being mindful that all spending has to be eventually paid for.
