Weighing the Risks and Benefits of Buying on Credit

America is very much a consumer culture, one in which many forces are constantly vying for our attention and, more importantly to them, our money. Many people are unable to pay for everything they buy at the moment they purchase it, or simply which to have all their purchases consolidated into a single monthly payment; this is where buying on credit comes in. The basic theory of credit cards is "buy-now, pay-later" ("Skills for Life"). This is different than using a debit card, where you paying for the amount directly out of your checking and/or savings accounts at the time of purchase. With a credit card, you are using money that is not yours. The financial institution that is loaning you the money is expecting you to pay them back for their service. If you do not repay the amount owed within a specific amount of time, extra charges will accumulate in your payment over time, known as interest. When looking to apply for a credit card, interest is not the only thing to look at (though it is very important). There are countless other aspects to consider, and to come to a good decision, one must weigh the risks and benefits that are associated with buying on credit.

There are many great things about credit cards that make them very attractive to many consumers. Many major credit cards are accepted at a wide variety of places, both domestic and worldwide ("Credit Cards..."). This is a great alternative to keeping track of different currencies as you fly country to country on, for example, business flights. However, they are not the 'all-encompassing' form of payment, and there are still many places that do not accept some/any type of credit card. Additionally, the size and convenience of a plastic card is preferable to carrying a big pile of money around with you. Credit cards are also, to a certain degree, safer than carrying around money. Having large amounts of straight cash on you might attract unwanted attention that could put you in danger, but a credit card is much more discreet way of paying for something. There is, however, always the risk of credit fraud, which happens when someone steals your credit card (or credit card information) and uses it to their own advantage. This is an even bigger risk today because of the surge in online shopping. With so much personal financial information being sent digitally, it is very important for a customer to keep mindful of their payment history. I once had an uncle who suddenly saw a spike in his bills for items he had not purchased. It happened around Christmas time, following many online payments he had made for gifts. He reported this to his creditor, and was not held liable because he had contacted them so quickly.

Another important reason for buying on credit-and paying off your bills on time-is to build a credit history. A good, reliable credit history is important when purchasing expensive things that few have enough money to pay for in one payment, such as a house, a car, or a boat. Your credit history is also assessed when you apply for a loan, a rental application, and even certain jobs ("The Importance..."). If you do not possess a good credit history, the things previously mentioned might be unattainable for you, which may leave you with very limited options. Keeping a good credit history is very important, and you should be always try to pay off bills as soon as possible to be certain your own history is not tarnished due to lack of payments on your part. Financial institution will not give away money if they think it will not be paid back, especially when large sums of money are requested.

It is important to understand that credit cards come with many different options attached to them, making it very important to consider what the terms of your card are. Some charge an annual fee to use them, while others do not. One may charge a high interest-rate when you do not pay bills on time, while another may charge a lower interest-rate. Different credit cards will give you different credit limits, which are used to put a limitation on how much you can spend in a given time with their card-spending over this amount will incur fees. Different cards may offer benefits, such a free airline miles, discounts from certain stores, cash rewards, or special insurances. Certain cards may charge fees for a multitude of activities, such as taking out a cash advance, exceeding a credit limit, or having no balance for a pre-determined duration time.

It is extremely essential that all the terms and conditions that go along with a card are considered. Something that you like in a card may be offset by something bad about the card. For example, one a card may have a low interest-rate but requires a yearly payment to use; another card may have a high interest-rate, but no yearly payment. Choosing your card in this case will depend on what works best for you. If you are good on paying your bills in full or do not plan to buy on credit extensively, the card with high-interest but no annual fee might be great for you. However, if you plan to buy a lot, incur high bills, and do not have full confidence in being able to pay all bills on time, a lower interest-rate with an annual fee might be a better option for you. In the end, it all comes down to personal necessity and assessing your life situation-you should pick the card that best fulfills your needs.

The biggest problem many people face when buying on credit occurs simply because they do not keep track of their expenditures. Being able to spend money you would not be able to otherwise is a great option to have, but indulging in it can carry many consequences. Buying on credit is not in any sense having "free money", because you will have to pay it later. When making purchases, many people forget this and end up blowing their budgets. Being unable to pay off bills and incurring monthly charges may seem like a small thing at first, but it can result in a downward spiral that becomes worse and worse. As interest and late-charges accumulate, a person may find that they have to start making many personal sacrifices in order to pay off bills. When the payments become too much for someone to pay off, things get ugly. Many people have found themselves facing massive debts and even bankruptcy because they were unwise in using their credit cards. This process also happens to be how credit card companies make most of their money-when you do not meet their terms for repayment (which you agreed to), the charges they incur are quite high. Many credit cards will incur charges up to 20-25% for not paying off balances at the end of a month ("The Importance..."). If you have a $500 balance, that would mean you are paying $100 or more on top of the $500 you already owe.

Another problem many people face when buying on credit is that they do not understand the terms of their credit card. The small print for the 'Terms of Use' is of the utmost importance when considering a card. Certain conditions may only last for a limited amount of time, or extra charges may be assessed when you don't expect them to. Along with understanding what using a certain card entails, you should retain a copy of the terms for yourself. Buying on credit also carries with it the responsibility of making sure you are being charged properly-knowing the terms of your card is an important part of awareness. Not knowing this increases your risk when buying on credit. All in all, the credit card is one is something that can be great if used wisely, and a nightmare if used recklessly. It is a financial tool that is only as useful as its user is wise. A great SNL skit comes to mind in light of all this. The skit is for a commercial spot. A couple is sitting at their kitchen table, talking aloud about how they simply cannot get out of debt. Steve Martin walks into the kitchen and tells them he can help them, to which they ask, "How?" Looking to the camera, Martin holds up a book and exclaims, "Just read my new book-Don't Buy Things You Can't Afford." The couple is dumbfounded, and so ensues a series of trade-offs where Steve Martin attempts to make the couple understand that they need to stop spending over their budget. "Can we buy a party boat?" the husband asks. "Do you have enough money to buy it?" Martin replies, and when the answer is no, he tells them they should not buy it. The couple considers this for a moment, then the wife blurts out, "But what if we really want the boat?" Just as these fictional characters, being able to buy on credit makes us feel the things we 'want' are much more accessible than they would be otherwise. And though this is true to an extent, it is important to buy on credit only as much as your budget allows. Planning ahead and not being tempted by the many Sirens of the consumer market will help decrease the risks of buying on credit. It is in being a smart consumer that the advantages of buying on credit are clearly seen.

Works Cited for Further Research

"Credit Cards...To Have or Not to Have?" Berkeley College Online. Feb. 4, 2008.

"Skills for Life: At Home - Credit Cards." Practical Money Skills for Life. Feb. 5, 2008. benefits_advantage.php>

"The Importance of Managing Money." Mountain State Centers for Independent Living Official Website. Feb. 5, 2008.