What to Consider When Using Credit

Many people love the idea of credit cards. You’re able to purchase goods or services when you want or need it, even if you don’t have the money on hand to cover the costs.

As convenient as they are, there are many things to think through when making purchases using credit.

Using credit has both advantages and disadvantages that are important to consider.

Advantages

• Convenience. You can carry a credit card instead of worrying about having cash, checks, or debit cards on hand.
• Timing. Maybe you’re short on money and can’t afford to purchase certain goods or services when you need them. When buying with credit, you can buy items without worrying if you have the money to spend or not.
• Installments. You have the option to pay off debt using a payment plan with smaller amounts.

Disadvantages

• Overspending. It’s easier to spend more than you need to when charging purchases to credit.
• Interest. You pay an additional fee when using a credit card, adding to your cost.
• Future Payments. When you buy with credit, you’re committed to paying off purchases, potentially affecting future spending.

Before using credit on purchases, it’s important to think about the cost, risk, and obligation associated with the agreement. Ask yourself the following questions before making large credit card purchases:

• Cost. Is it worth the extra money to buy on credit? Do I really need the good or service I want to purchase? Will my payments fit into my budget?
• Risk. What if something happens? Could I still pay my credit off? Do I want to risk a bad credit history or legal action if I’m unable to pay off my credit?
• Obligation. Would it be wiser to save money and purchase the good or service later? Can I afford having monthly payments? Do I understand my contract?

How much should you use on credit purchases? A mistake many people make is using too much of their income to cover costs associated with credit card purchases. It’s recommended to commit no more than 20 percent of your income towards paying off debt. A more manageable number would be 10 to 15 percent of your income.

Think through how much money you can realistically and safely budget towards credit card debt. Think through income, emergency funds, savings, and how much debt you already have. You don’t want to find yourself in financial trouble and burdened by a large amount of debt.

Managing your finances isn’t one of the most glamorous aspects of life. If you need help understanding credit or balancing your finances, contact your MSU Extension Office.