You probably have a basic understanding of how credit works. It is when you borrow someone else’s money, be it a bank, a friend or a mortgage company to buy something today and then repay the lender at a later date at an interest. A few decades ago, consumers would visit chain stores to fulfil their personal needs and pay in cash. Over the years, a lot has changed. The arrival of credit card and a host of other convenient ways to pay has acquainted consumers to the new concept of shopping on credit.
Today, credit is the most common borrowing tool for Americans with most of them relying on them to make everyday purchases. However, just like any other commodities, credit has its positives and negatives.
If a person is able to manage their debt well and use credit cards to their advantage, they can end up benefiting from the entire process immensely. On the other hand, one can find themselves in financial trouble.
Positive ways credit is changing the world
Improved standards of living
Many years back before the introduction of credit, consumers had to save up for special purchases or to take out a loan, which was usually left for major purchases such as a car or a house. The introduction of credit, especially in the form of credit cards now allows consumers to make purchases before saving for them. The immediate effect is usually an improved standard of living in the present moment. Also, when people buy on credit as opposed to waiting to save up to buy later, businesses receive more revenue and the economy flourishes.
Safety and convenience
Credit can make life a little less hard. These cards ensure that you don't walk around carrying stacks of cash wherever you go. Also, it gives you the ability to shop online as opposed to queuing at malls and stores. If you are a frequent traveller, you can use your credit card to make plane and hotel reservations, renting transportation and managing your expenses while on the road.
Some credit cards offer users reward programs. Through these programs, you can earn redeemable points that you can use for cash, travel, goods or services. Just make sure to charge and pay your debt balance in full.
Negative ways credit is changing the world
This credit trend has left America in a revolving all-time high debt of $1 trillion as of early 2018. Although credit acts as a catalyst for economic growth, superfluous credit amounts can introduce risks to the economy. When consumers are unable to pay back their debt, there occurs serious effects on both personal and national levels.
If you constantly carry a balance on your credit cards, your interest rates become high. You may even end up paying the credit companies up to three times what you owed them initially. If you only make the minimum payments, the amount you pay may become even higher and may take you years to get out of the debt.
To the average consumer, access to credit promotes increased spending. According to Dave Ramsey, the author of the bestselling “Financial Peace,” an individual is likely to spend 12 to 18% more with a credit card than they would with cash.
Unfortunately, this is causing people to go through life under the burden of crushing credit card debt. Credit causes the buy now, pay later mentality, which can lead to serious debt overload if you don't use it wisely. This usually happens when you are constantly charging purchases to your card and you fail to pay them in full each month, or when you find yourself opening multiple lines of credit because you have maxed out your credit.
Negative impact on your financial goals
Credit may slow down your financial goals. The money you use to pay your credit bills is the same money that you could have been using towards building your savings or advancing your financial goals. Instead, you spend it on paying extortionate interest rates rather than saving it for more important things such as buying a home, saving for retirement, or even for a dream vacation.
Credit cards come with many positive and negative aspects. The bottom line is that how you use your credit will essentially determine the quality of your current and future lifestyle.