Cash vs Credit – The Battle Lines Are Drawn

It is a certain fact that where credit used to be the preserve of a few people with major disposable income, now loans and credit cards are common parts of life for most sections of society. This has led to situations where it is assumed that the less well-off are the people who like to take out credit and get into difficulties, believing that society cannot do anything about it. However, it seems clear now that even billionaire and trillionaire banks have been just as slack in their credit control as anyone else. It is more a question of who applies common sense in their banking practices than anything else.

An increasing number of people who have seen friends, family or anyone else trying to use credit to run their finances and making a mess of it are now deciding that credit is not for them. In times of plenty, a credit card can be a convenience tool to make purchases at short notice, safe in the knowledge that the money to pay it off will be there when needed. In the present day, however, there is a lot less certainty about this and people are unwilling to take the risks attached to credit.

By making sure that you only use cash to make the purchases you need to make, you can guarantee that you only use money that is available here and now. It may not be as much fun sometimes, but it allows you to keep a close eye on your finances.

Why Do We Use Credit?

When someone falls into debt due to a history of using credit there is invariably a rush of questions as to why they saw fit to borrow so much in the first place. Part of the reason is the way that credit has been sold by the banks – if you apply today you could have that new car tomorrow – and part is due to the fact that people always feel more secure the more money they have. The word “credit” has always been associated with positive things, but in a financial sense it actually has more to do with debt than with anything totally positive. The overall issue is that “credit” actually relates to debt.

If “credit” was always called “debt” it is likely that fewer people would be as willing as many of us currently are to take large amounts of it. When we use a credit card, we are not using our own money, but actually borrowing from a bank to pay for something. Sometimes this is unavoidable, or at least the “best” option – in the case of medical treatment, for example, or unavoidable travel. As often as not, though, it is for something we want, not something we need.

Being credit aware is more important now than ever. Banks, who once were happy to give credit in the knowledge that they would get it back with interest, are now a great deal more careful in terms of who they give money to. Extending the terms of your credit may not be as easy an option now. It is wise to think before taking the plunge.

Your Credit Rating And What It Affects

Any time you take out credit for the purposes of making a purchase, or for any other reason in fact, this information goes onto a file which is held by any one (or more) of a number of credit monitoring agencies in your country. Any payments you make (or miss) and any changes to your account are recorded on this file. Depending on the agency, your credit rating is judged on the basis of the information held on this file. Any payments you make are given a positive score (the higher the payment, the better the score) and any you miss are given a negative score.

The scores are tallied into an overall score marking your credit history, and your worthiness for further credit. This is then consulted by any company or lender who wishes to appraise your application for credit. If you have a history of missing payments, then the low score you receive will make it less likely you can secure credit for a further purchase. A history of making payments on time and in full will make it more likely.

Of course, there are other things taken into account. Your monthly income is also important, as even people who are very responsible when it comes to making the payments expected of them will struggle when it comes to paying a monthly payment that makes up a significant portion of their monthly income. Over commitment is a major reason why people fall into serious debt, so pay attention to your commitments.

A Life Of Debt

Since about a decade ago, the rise in numbers of people using credit to fund larger purchases has been steep. We have definitely become more impatient as a society, and this has meant that where we see an opportunity to acquire expensive consumer items we are unlikely to spurn that opportunity. Due to the rise in availability of credit in the early part of this century, this has seen people taking out loans or putting expensive purchases on a credit card, to spread the cost over time. But is it a good thing? Certainly, none of us are complaining when we get home with our big screen TV or new car, but what about when the payments start?

There are people who pay off their credit card balance in full when they receive their statement for the month, and in doing so build an excellent credit rating. By doing this they also avoid the dangers of interest and late payment fees, and keep the card clear for purchases which need to be made at short notice. It is entirely reasonable to use credit in this way, but the big risk is when you are making only the monthly payment each month on the balance of your card. Doing this, it will take forever to pay it off. If you are using credit to pay for continuing, necessary costs, then you are likely to run into problems somewhere along the way. Work out a budget and live by it – it may be tight, but you’ll never have to hide when the doorbell rings.

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