Either through discretionary spending or as a result of emergencies and other inadvertent expenses, many of us carry some amount of debt. It has increasingly become part of how we make purchases and conduct business. As consumers, this has made our lives more convenient, but it can also create problems.
When to Use Credit – Without credit, most of us would be unable to make larger purchases, such as a car or house, or pay for a college education. These things either fulfill basic needs or are investments that can create greater value for us over time, so assuming debt to pay for them is not necessarily bad. Unfortunately, many people end up in debt by living beyond their means and charging discretionary purchases, rather than saving in advance for them, or by having no financial cushion set aside to cover unexpected expenses.
Choosing the Right Credit Option – There are a number of different credit options available to consumers, each with specific characteristics that make it best suited for certain uses. Broadly speaking, whether or not a particular type of credit is suited to a particular use will be determined by the amount to be borrowed and the amount of time over which the loan is to be repaid. For instance, a credit card may be the best choice for making a small purchase that you plan to pay off fairly quickly, but for a larger purchase—say, a car—a secured loan, such as a New or Used Auto Loan from Community Bank, is probably the better choice. Later, we will look at different forms of credit in more detail to see how they work and to what uses they are ideally suited.
Use Credit Wisely – Even though you may have credit available to you, you should avoid using it to make purchases beyond your means. Using a credit card, even for small purchases, can add up quickly. If you can pay your balance off in full each month, a credit card is a convenient method for making purchases. However, if you can’t, you’ll probably find it easier and less expensive to save in advance for these purchases, rather than carrying a credit card balance. Using credit wisely means using it with discretion.
Read the Fine Print – When borrowing money, be sure you understand the terms of the loan. Primary among these is the interest rate. This is most often expressed as the APR (Annual Percentage Rate). Knowing the interest rate as APR gives you a common point of comparison with other credit sources. There are other considerations that can affect the true cost of credit, as well. We will look at these in more detail when we examine different forms of credit.
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