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Those credits can leave you strapped of funds
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It is usually easier said than done. “Put it in my account I will pay later.” As this phrase indicates, the use of credit is a fact of life in personal financial management and planning and has come to stay.
It is understood that when you use credit, you satisfy needs today and pay for this satisfaction in future. While the use of credit is often necessary and even advantageous, responsibilities and disadvantages are associated with its use.
Perhaps this underscores why the Federal government is positioning the economy towards a cashless economy.
Credit is simply defined as a situation whereby you receive cash, goods, or services now and pay for them later. Consumer credit refers to the use of credits for personal reasons except buying a house or landed property by individuals and families in contrast to credit used for business purposes.
Interestingly, using and providing credits have been a way of life for many people and businesses in today’s economy. Most consumers have three alternatives in financing current purchases. They can draw on their savings, use their present earnings, or borrow against their expected future income. Each of these alternatives has trade-offs. If you continually deplete your savings, little will be left for emergencies or retirement income. If you spend your current income on luxuries instead of necessities, your well being will eventually suffer. And if you pledge your future income to make current credit purchases, you will have little or no spendable income in the future. Consumer credit is based on trust in peoples ability and willingness to pay bills when due. It works because people by and large are honest and responsible. But how does consumer credit affect the economy and families? In Nigeria there is no clear history when the practice was initiated years ago the progress has been slow and bogged down by numerous hiccups. However, the Federal Government is putting in place fresh machinery that would resuscitate credit transactions and galvanise the economy.
Use and misuse of credit facilities
It is true that using credit to purchase goods and services may allow consumers to be more efficient or more productive or to lead a more satisfying life. There are many valid reasons for using credit. A medical emergency may leave a person strapped of funds. You may need a car today after a long leave. It may be possible to buy an item now for less money than it will cost later especially household items. Borrowing for a University or college education is another valid reason. But it probably is not reasonable to borrow for everyday living expenses or finance a big car on credit when your budget allows for a small car. Using credit increases the amount of money a person can spend to purchase goods and services now. But the trade-offs is that it decreases the amount of money that will be available to spend in the future. However, many people expect their income to increase and therefore expect to be able to make payments on past credits purchases and still make new purchases. Before you take any decisions on credits here are some pertinent questions you must consider before you decide how and when to make a major purchase, for example, a car.
Do I have the cash I need for the down Payment?, Do I want to use my savings for this purchase? Does the purchase fit my budget? Could I use the credit I need for this purchase in some better way? Could I postpone the purchase? What are the opportunity cost of postponing the purchases for instance (alternative transport cost as possible increase in the price of the car). What are the other costs and Psychological costs of using credit (interest, other finance charges, being in debt and responsible for making a monthly payment. If you decide to use a credit make sure the benefits of making the purchase outweigh the costs of using the credit. Thus credit when effectively used can help you have more. When misused, credit can result in disaster, default, bankruptcy and loss of credit worthiness.
One of the significant merits of a credit transaction is that it enables people to enjoy goods and services now and during emergencies as well as allowing them to pay for several purchases in one month. Again, people believe it is more than a substitute for cash. Many of the services it provides are often taken for granted. Every time you flick the light switch, turn on the water tap or telephone a friend you are using credit.
The use of credit indicates stability. The fact that lenders consider you a good risk usually means you are a responsible individual. However, if you do not repay your debts in a timely manner, you will find that credit has many disadvantages.
Perhaps the greatest disadvantage is the temptation to overspend, especially during periods of inflation. It seems easy to buy today and pay tomorrow using cheap money. But continual overspending can lead to serious trouble. Whether we like it or not, credit involves security (something of value to back the loan), failure to repay a loan may result in the loss of income, valuable property and your good reputation. It can even lead to court action and bankruptcy. Misuse of credits could create serious long term financial troubles, damage to family relationship and slowing of progress towards achieving a virile financial goal.
This is why we must approach credits with great caution as well as avoiding using it extensively than your budget could permit. Credits also tie up future income and do not in anyway increase purchasing power. Consequently, we must ask ourselves whether our credit purchases would have lasting value otherwise it is advisable to resist plunging into credits. They could be attractive today but would have daring consequences in the nearest future.
It is understood that when you use credit, you satisfy needs today and pay for this satisfaction in future. While the use of credit is often necessary and even advantageous, responsibilities and disadvantages are associated with its use.
Perhaps this underscores why the Federal government is positioning the economy towards a cashless economy.
Credit is simply defined as a situation whereby you receive cash, goods, or services now and pay for them later. Consumer credit refers to the use of credits for personal reasons except buying a house or landed property by individuals and families in contrast to credit used for business purposes.
Interestingly, using and providing credits have been a way of life for many people and businesses in today’s economy. Most consumers have three alternatives in financing current purchases. They can draw on their savings, use their present earnings, or borrow against their expected future income. Each of these alternatives has trade-offs. If you continually deplete your savings, little will be left for emergencies or retirement income. If you spend your current income on luxuries instead of necessities, your well being will eventually suffer. And if you pledge your future income to make current credit purchases, you will have little or no spendable income in the future. Consumer credit is based on trust in peoples ability and willingness to pay bills when due. It works because people by and large are honest and responsible. But how does consumer credit affect the economy and families? In Nigeria there is no clear history when the practice was initiated years ago the progress has been slow and bogged down by numerous hiccups. However, the Federal Government is putting in place fresh machinery that would resuscitate credit transactions and galvanise the economy.
Use and misuse of credit facilities
It is true that using credit to purchase goods and services may allow consumers to be more efficient or more productive or to lead a more satisfying life. There are many valid reasons for using credit. A medical emergency may leave a person strapped of funds. You may need a car today after a long leave. It may be possible to buy an item now for less money than it will cost later especially household items. Borrowing for a University or college education is another valid reason. But it probably is not reasonable to borrow for everyday living expenses or finance a big car on credit when your budget allows for a small car. Using credit increases the amount of money a person can spend to purchase goods and services now. But the trade-offs is that it decreases the amount of money that will be available to spend in the future. However, many people expect their income to increase and therefore expect to be able to make payments on past credits purchases and still make new purchases. Before you take any decisions on credits here are some pertinent questions you must consider before you decide how and when to make a major purchase, for example, a car.
Do I have the cash I need for the down Payment?, Do I want to use my savings for this purchase? Does the purchase fit my budget? Could I use the credit I need for this purchase in some better way? Could I postpone the purchase? What are the opportunity cost of postponing the purchases for instance (alternative transport cost as possible increase in the price of the car). What are the other costs and Psychological costs of using credit (interest, other finance charges, being in debt and responsible for making a monthly payment. If you decide to use a credit make sure the benefits of making the purchase outweigh the costs of using the credit. Thus credit when effectively used can help you have more. When misused, credit can result in disaster, default, bankruptcy and loss of credit worthiness.
One of the significant merits of a credit transaction is that it enables people to enjoy goods and services now and during emergencies as well as allowing them to pay for several purchases in one month. Again, people believe it is more than a substitute for cash. Many of the services it provides are often taken for granted. Every time you flick the light switch, turn on the water tap or telephone a friend you are using credit.
The use of credit indicates stability. The fact that lenders consider you a good risk usually means you are a responsible individual. However, if you do not repay your debts in a timely manner, you will find that credit has many disadvantages.
Perhaps the greatest disadvantage is the temptation to overspend, especially during periods of inflation. It seems easy to buy today and pay tomorrow using cheap money. But continual overspending can lead to serious trouble. Whether we like it or not, credit involves security (something of value to back the loan), failure to repay a loan may result in the loss of income, valuable property and your good reputation. It can even lead to court action and bankruptcy. Misuse of credits could create serious long term financial troubles, damage to family relationship and slowing of progress towards achieving a virile financial goal.
This is why we must approach credits with great caution as well as avoiding using it extensively than your budget could permit. Credits also tie up future income and do not in anyway increase purchasing power. Consequently, we must ask ourselves whether our credit purchases would have lasting value otherwise it is advisable to resist plunging into credits. They could be attractive today but would have daring consequences in the nearest future.
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