CREDIT

Understanding Credit

    The most important thing to understand about credit is the nature of the personal transaction you are making when you use credit.

When you use credit you are promising someone that you will use your future labor to pay them back.  In addition, you are committing to using some additional amount of your future labor to pay them interest on the money you borrow.

The danger is that if you pile up such a large debt that you can only make interest payments, you will be a slave to your creditor(s).

The issues are the same whether you are talking about a credit card, a student loan, a car loan, a home mortgage or any other type of loan.  But the consequences can be very different depending on the size and terms of the loan.

You should NEVER, NEVER, NEVER use credit without fully understanding the terms of the loan.  And you should always do a personal cost-benefit analysis to determine if you are making a decision that benefits you.

When you try to understand the terms, you should try to understand the real impact to you.  It’s one thing to know what the minimum payment on a credit card is and that your budget will allow you to make it.  A better understanding is to find out how much your purchase will cost you and how much less it will cost if you put the payment in a savings account for a while and make your purchase with cash.  You should also understand your entire commitment for all of your uses of credit, not just the one you are contemplating.