Understand the Cost of Credit

Understand the Cost of Credit


Credit makes it easier for the average person on a fixed income to afford to buy high dollar items. With credit, you can pay off your purchases with regular monthly payments, and you can begin to enjoy using the product immediately. The alternative to using credit is to save your money for many months or longer so that you have enough cash built up to make the purchase.

This means that you cannot enjoy the use of the product for a lengthy period of time. While using credit does have its positive benefits, it is not without costs. It is important for all consumers to understand the true cost of using credit before making a buying decision. While you may still decide to use credit after reviewing the costs, you may be able to structure the purchase so that the related costs are reduced.

Review the Fees

There are many fees and expenses associated with the use of credit. The most obvious expense relates to interest charges. Most credit cards and installment loans have interest charged on the principal balance, but this is not always the case. For example, you may be able to take advantage of a special offer that gives you credit with no interest charges for a limited period of time.

This means if you pay off the balance in full during that period of time, you may not pay any interest fees. Read the find print on this. In some cases, if you do not pay the full balance within the limited time period, you may have to pay back interest on the account.

There may, however, still be fees tied to the use of credit even if you do not have interest charges. For example, an installment loan may have lender’s fees or other financing fees tied to it. Both credit cards and installment loans may have late fees if you do not make your payment on time. With credit cards, your account may have an annual fee that is assessed whether you use the account or not.

Understand Loan and Credit Terms

There are two main types of credit options available, and these are installment loans and revolving lines of credit. With an installment loan, the principal balance must be repaid in full within an established period of time, and this time period is known as the loan term. For example, if you apply for a four year installment loan, you will make equally monthly payments over the course of four years.
At the end of the four year period, the balance will be paid in full. The other type of loan is a revolving line of credit and this typically is what a credit card is. It can be much more difficult to pay off a revolving credit line, and this is because there is not a fixed term length. You can use an online calculator to estimate how long it will take you to pay off your credit card balance when you make minimum monthly payments on the debt.

When possible, choose to use an installment loan versus a credit card. If you have to use a credit card, always make more than the minimum monthly payments so that the debt can be repaid more quickly.

You can get a Free Debt Consolidation Quote to see what rates are available right now.

Research Lending Options

Get Debt ReliefNow that you are educated about installment loans, revolving credit lines and the various fees and expenses linked to debt, you may consider researching the lending options available. Many stores that sell high ticket items, such as appliances or furnishings, offer in-house financing options.

Read the fine print on these offers to ensure you understand the repayment terms and fees. Also, take note that applying for new credit can impact your credit score. Compare this option against using your own credit card or saving up to make the purchase.

Credit can be highly beneficial in terms of helping you to make large purchases more affordable, but credit does have its costs. In some cases, it may be better to save up to make purchases. Consider all aspects of using credit to make purchases before you make a final decision about how to pay for your high-priced purchases.

Are you interested in financial freedom? What other questions do you have for me on how rid yourself of debt?

If you are interested in learning how how to get out of debt, I created a FREE 10 Days to Financial Freedom eCourse tutorial that will help you get out of debt.

Like it? Please comment and share thoughts and recommendations.