Despite its benefits, the use of credit has a downside. Negative aspects include interest costs, the potential for overspending, credit’s negative effect on your financial flexibility, and concerns about privacy.
Use of Credit Reduces Financial Flexibility: The greatest disadvantage of credit use comes from the loss of financial flexibility in personal money management. As the old German proverb states, “He who borrows sells his freedom.” The money that you pay each month on your debts is money you could have spent elsewhere on other opportunities. Credit use also reduces your future buying power, as the money you pay out on a loan includes a finance charge as well as the principal. In fact, credit can be seen as a promise for you to “work for the creditor” in the future to pay off your debt.
It Is Very Tempting to Spend More Money: A major disadvantage of credit is that its use can lead to overspending. Using a credit card to buy Rs 10,000 worth of new clothes and paying Rs 500 per month for 36 months (a total of Rs 18,000: Rs 10,000 for cost of clothes and Rs 6,000 for interest charge) may seem less painful than paying cash for a planned purchase of only Rs 10,000 worth of clothes. The problem is this: Once you begin carrying credit card debt, it may seem easier to buy more on credit, especially if you have more than three or four cards—as is typical for Indian credit card holders.
Debt Reduces Your Ability to Save and Invest:
Saving and investing over long periods of time is the key to building wealth. Taking on excessive debts early in life will seriously compromise your goal of being financially successful.