Buying On Credit

Credit cards can provide flexibility and help you manage your money. If you pay off your balance every month, they’re a convenient way to buy things interest free. But before you buy anything on credit, you should ask yourself these questions.

Do I really want or need the item, or am I just buying on impulse?

Because consumer credit is available to most people in the form of a credit card, it’s often too easy to buy something. When cash doesn't change hands, it can seem as if you aren't spending real dollars. Don't let the convenience of a credit card lure you into extravagant or foolish spending.

If I buy on sale now will the money I save be more than the interest charges I will pay by buying on credit?

If you use a credit card for the purchase, you will avoid an interest charge only if you pay the balance in full when your next statement falls due. If you take out a loan, interest charges begin immediately.

Before you buy on credit, calculate the time it will take you to repay the amount and the interest cost. If the interest cost exceeds the savings from the price reduction, you would be wise to wait until you can afford to pay cash.

If the item is expensive, will paying cash for it cut too deeply into my current savings? Or, will the loss of interest on my savings be greater than the interest cost on a loan?

Your savings provide you with a cushion in case of financial emergency and with earnings on your investment. Sometimes, paying cash for a high-priced item can be more costly than borrowing the amount you need and paying interest on the loan.

If I wait until I’ve saved enough to pay cash, will the price increase substantially in the meantime?

Higher-priced purchases, such as major appliances and cars, tend to become more expensive from year to year. Unless you are able to save quickly, it may be to your advantage to take out a loan and buy the item sooner rather than later. But only if your budget can accommodate repayment of the loan out of current earnings.

By making a long-term credit commitment, how secure and stable is my current financial situation?

For most people, a purchase such as a house is possible only by means of a mortgage. It’s a long-term commitment to making what are often substantial monthly payments. In determining how much you can afford to pay each month, be sure you leave yourself some "breathing room". If your employment situation should change and your monthly income is decreased, will you still be able to meet your monthly payments?

Using credit can benefit you in many ways. But if loan or credit repayment is not carefully budgeted, it can lead to financial strain, possibly even to the point where you are unable to make your payments.

Before using credit, you should determine how much you can realistically afford.