Meaning of Credit
Credit can be used in very positive ways to enhance personal financial planning. Following are some of the reasons people use credit:
- For convenience. Using credit cards simplifies the process of making many purchases. It provides a record of purchases, and it can be used as leverage if disputes later arise. Convenience use of credit is growing. For example, many of us now use credit cards at the grocery store and the gas station. Convenience use is justified only if the card balance is paid in full each month, however. You do not want to be paying for today’s restaurant meal for months or years in the future.
- For emergencies. Consumers may use credit to pay for unexpected expenses such as emergency medical services or automobile repairs.
- To make reservations. Most motels, hotels, and car rental agencies require some form of deposit to hold a reservation. A credit card number can serve as such a deposit, allowing guaranteed reservations to be made over the telephone. In many cases, the hotel will notify the credit card issuer to put a hold on your account for the anticipated total amount of the charge. This common practice is called credit card blocking.
- To own expensive products sooner. Buying “big ticket” items such as a home or automobile on credit allows the consumer to enjoy immediate use of the product. Many expensive items would not be purchased (or would be bought only after several years of saving) without the opportunity to pay for them over time. The expected life of the product should be at least as long as the repayment period on the debt.
- To take advantage of free credit. Merchants sometimes offer “free” credit for a period of time as an inducement to buy. Free credit, however, should not be used to buy a more expensive item than you can afford. Known as “same as cash” plans, these programs allow the buyer to pay later without incurring finance charges. The free credit lasts for a defined time period, but interest may be owed for the entire time period if the buyer pays even one day after the allotted free-credit period ends.
- To obtain an education. The high cost of education has forced many students to use student loans. This may be one of the better uses of credit, as the borrower is investing in himself or herself to raise the quality of life and/or income in the future.