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Credit
helps to pay for goods and services that cost more than you
can afford now. It enables you to acquire expensive assets
like a house and car without having to pay for them fully
for many years. This is because repayments of credit are scheduled
and spread over a long period of time.
Loans
also enable you to meet emergencies such as sudden unemployment.
Though savings ought to be the preferred way to deal with
emergencies, credit is also becoming the preferred mode of
payment. Just about anything can be charged to the credit
card. It is not only safer than carrying cash, but the spending
record it keeps also aids the budgeting process. Convenience
is increasingly the prime motive for borrowing.
Overspending
may be the greatest misuse of credit! Consumers may be overwhelmed
by their sudden ability to buy things that they get 'hooked'
on credit. The problem is that over-spenders will not admit
that they are spending too much, thinking that they are alright
as long as they make the minimum repayments. Unfortunately,
they don't realise that they must eventually pay in full whatever
they have spent. They fail to realise that the consequences
of not being able to do this includes a damaged credit history
and lawsuits by credit companies that might lead to personal
bankruptcy.
Rules of prudent credit management
Lenders
are willing to make loans because borrowers pay back the money
(principal) plus a fee (in the form of interest) for using
it. It is costly to borrow, thus, excessive borrowings should
be avoided in general.
The
three rules always to follow include:
Make sure all purchases made by loans are absolutely necessary.
Using credit prudently to finance big-ticket items like cars
and a roof over the head may be necessary for us. However,
the real danger is using credit to make frivolous purchases.
Make
sure you have the means to repay the loan. If you doubt that
you have the ability, then you probably don't! Make sure that
your budget can accommodate the loan repayments.
Constantly monitor your debt level and do not let it get out
of hand!
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