“Credit” is a word that we have been referring so much these days. What is credit? Let us begin by understanding what it is. It is based on trust. It is the ability of any customer to receive service or goods before paying for it. Payment in such cases is done on a future date. Here, the amount or the cost of the product or service is termed as “credit.” The word “credit” has its origin from Latin word ‘credere’ which means “to believe.”
The western world has embraced the aspect of its purchases and various other uses of credit for quite some decades. Indian consumers have begun to embrace this aspect of it only since the last decade. Prior to that, they were of the opinion “buy on cash, else just don’t”. It is in the last the years that the Indian consumer has opted for a credit purchase.
In a credit system, the lending institution approves its based on the borrowers’ disposable income and capacity to repay.
Why-to use credit:
Opting for a credit depends on the borrower / consumer’s confidence to repay it on time and the borrower’s determination not to default payment. Buying on credit can range from buying movie tickets and holidays to buying luxuries home for the future of the family.
That adds flexibility the financial planning of the borrower. Some things which the borrower needs and wants to buy now, but cannot pay for immediately are made affordable. It has to considered a privilege if the borrower seeks more enjoyment of benefits. This helps to spread the cost of product or service over time.
Many people consider that buying on credit is more viable than buying on their savings. This is because rebuilding savings is more difficult than repaying it taken.
Wise / responsible use of credit:
Credit should be considered neither negative nor positive. It can only be used smartly or poorly.
Where the wise use of credit enables the consumer to improve his lifestyle and makes expensive things affordable, unwise planning can only lead to serious financial implications. While buying on that, the buyer commits his / her future earning toward that product or service.
Keep these points in mind when you buy on credit:
- Prepare a list of all expenses that recur monthly, via, fixed (rent, loans etc.), flexible (electricity, food, petrol etc.) and periodic (insurance, taxes etc.).
- Keep a buffer for any emerging emergencies.
- Do not spend more than 20% of your income in instalments, home loans excluded.
- Keep sufficient provisions for your savings.
- Ensure to know of the terms and conditions of the credit, such as interest percentage, the limit on credit card, and charges on credit card withdrawal.
- Be sure amount how much of additional income you want to commit on credit repayments. This can affect further credits and other emergencies.
- Ask yourself the question: “Is this credit purchase a part of my financial goal, or can it wait”?
- If you are purchasing a luxury, make sure you really need it at that point.
To sum up, the borrower needs to understand that responsible credit ultimately revolves around the family budget and the affordability to repay loans. It is justified if the borrower is towards, home, home improvement, vehicles, education or any product or service which lasts beyond a certain time. In case the borrower is for the day to day expenses like food, petrol and other utilities, then heads up!!! You are in for trouble in this case. It will recur and accumulate further before you can pay the previous one.
Living within your means is exactly what means by ‘smart use of credit.’ Limit the size of your that to your affordability. Increase it in proportion to your increase in income.
Be credit smart!!!