Cash vs Credit – The Battle Lines Are Drawn

It is a certain fact that where credit used to be the preserve of a few people with major disposable income, now loans and credit cards are common parts of life for most sections of society. This has led to situations where it is assumed that the less well-off are the people who like to take out credit and get into difficulties, believing that society cannot do anything about it. However, it seems clear now that even billionaire and trillionaire banks have been just as slack in their credit control as anyone else. It is more a question of who applies common sense in their banking practices than anything else.

An increasing number of people who have seen friends, family or anyone else trying to use credit to run their finances and making a mess of it are now deciding that credit is not for them. In times of plenty, a credit card can be a convenience tool to make purchases at short notice, safe in the knowledge that the money to pay it off will be there when needed. In the present day, however, there is a lot less certainty about this and people are unwilling to take the risks attached to credit.

By making sure that you only use cash to make the purchases you need to make, you can guarantee that you only use money that is available here and now. It may not be as much fun sometimes, but it allows you to keep a close eye on your finances.

The Risks of Living On Credit

It is always difficult to live frugally when all around you seem to have more possessions, more money and simply more fun. There are few people in the world who do not enjoy having new, enjoyable possessions which can make life easier, more varied and overall just more fun. The risk of seeing life in this way is that it can make people go to extreme lengths to keep up. No small amount of the financial turmoil that is seen on an individual basis very frequently happens for this very reason. When people around you always seem to have the best clothes and gadgets, and be enjoying life more, there is a real chance that they are living beyond their real means.

Spending money is fine, as long as there is money there to spend. Otherwise, it needs to be considered long and hard in the context of your situation. If you are making a purchase on a credit card, ask yourself if you can afford to make the payment that is required at the end of the month (or whenever your payment cycle places the due date). If it is a matter of making the purchase now and worrying about how you will pay for it later, it is really a good idea to refrain.

Think of it like this: credit cards make it easier to spend money, but that money is not technically yours. Spending money that you need to pay back, and not having the means to pay it back, is like trying to outrun a hungry lion. The credit card may act as a vehicle to escape the lion, but sooner or later you run out of fuel.

Why Do We Use Credit?

When someone falls into debt due to a history of using credit there is invariably a rush of questions as to why they saw fit to borrow so much in the first place. Part of the reason is the way that credit has been sold by the banks – if you apply today you could have that new car tomorrow – and part is due to the fact that people always feel more secure the more money they have. The word “credit” has always been associated with positive things, but in a financial sense it actually has more to do with debt than with anything totally positive. The overall issue is that “credit” actually relates to debt.

If “credit” was always called “debt” it is likely that fewer people would be as willing as many of us currently are to take large amounts of it. When we use a credit card, we are not using our own money, but actually borrowing from a bank to pay for something. Sometimes this is unavoidable, or at least the “best” option – in the case of medical treatment, for example, or unavoidable travel. As often as not, though, it is for something we want, not something we need.

Being credit aware is more important now than ever. Banks, who once were happy to give credit in the knowledge that they would get it back with interest, are now a great deal more careful in terms of who they give money to. Extending the terms of your credit may not be as easy an option now. It is wise to think before taking the plunge.

Your Credit Rating And What It Affects

Any time you take out credit for the purposes of making a purchase, or for any other reason in fact, this information goes onto a file which is held by any one (or more) of a number of credit monitoring agencies in your country. Any payments you make (or miss) and any changes to your account are recorded on this file. Depending on the agency, your credit rating is judged on the basis of the information held on this file. Any payments you make are given a positive score (the higher the payment, the better the score) and any you miss are given a negative score.

The scores are tallied into an overall score marking your credit history, and your worthiness for further credit. This is then consulted by any company or lender who wishes to appraise your application for credit. If you have a history of missing payments, then the low score you receive will make it less likely you can secure credit for a further purchase. A history of making payments on time and in full will make it more likely.

Of course, there are other things taken into account. Your monthly income is also important, as even people who are very responsible when it comes to making the payments expected of them will struggle when it comes to paying a monthly payment that makes up a significant portion of their monthly income. Over commitment is a major reason why people fall into serious debt, so pay attention to your commitments.

How To Build Good Credit

Credit comes with pitfalls. We are told this regularly and for many people it seems to be all they ever hear about the process of paying with credit. However, if managed to your advantage, you can make credit cards work for you. Bear in mind that banks and lenders are quick to add charges to accounts when they feel that there is an opportunity to do so – and don’t give them the chance to do it. Do you believe that it costs them that much to administer to your late payment? Of course not – so make sure you are in the driving seat.

To do this, it is a matter of using credit in ways that the bank won’t recommend. The “monthly” payment on your credit card will usually be set at a small percentage of the balance, and the bank will be happy for you to only ever pay that, because you will pay off more than you ever borrow. Interest, plus any charges, will amount to as much money as you borrowed in the first place. However, you can pay more than the monthly payment, so here is how to make it work for you.

When you take out a credit card, use it as you would use an ATM or debit card. Pay for groceries with it when you get your wages at the end of the month, and then instantly pay the balance off in full. For a while, live off credit and use the money that goes into these costs to make payments to your card. Your credit rating will soar. Your bank will offer you better terms. You’ll be in the driving seat.

How To Turn Things Around

It is a very rare kind of person that does not have money problems at some point in your life. It is important to realize in the circumstances that missing a single payment on your credit card does not make you a bad person, a financially reckless individual or a debt risk. This is not because it is fine to miss a credit payment – ideally, it won’t happen to you – but because there is a way back from credit problems. You need to be concentrated on finding that way back and taking it – but as long as you keep a clear head, this is more than manageable.

Missing one credit card payment is unlikely to strip you of a positive credit rating in one fell swoop. What you need to keep in mind is that there are very good reasons to treat your first missed payment as a warning sign. If you fall into longer term problems with debt, it will be much harder to escape them. For this reason you should focus on that payment and tell yourself that it won’t happen again. Pay attention to making the payment when you can, and meeting the next one when it becomes due. By sticking to this promise to yourself you will make it far more likely that the one missed payment was an aberration. If you think that you will have problems making payments going forward, look for alternative solutions such as consolidation or debt management, rather than letting the problem grow.

Unsecured Credit – You Still May Lose More Than You Gain

Although there are obvious pitfalls to taking out a mortgage or a new car loan which are not a problem with unsecured credit, there is no doubt that unsecured borrowing can still be a very risky endeavor. Just because the lender cannot repossess your possessions to make good on the loan, this does not mean that you cannot be put in a very risky situation financially. The first thing that will happen when you miss a payment on a loan or credit card is that you will go into the company’s “collections” file and they will pursue you for payment.

As well as entering the collections department, you will find that your credit record will contain the information of your missed payment. There are certain kinds of borrowing that are available to people with perfect credit ratings, including loans that have extremely low interest rates. A black mark on your credit rating will be enough to disbar you from ever qualifying for such lending, and will mean that any credit you do get will be very much on the lender’s terms.

Borrowing money can be the solution to a problem in a number of situations, but it is important to realize that without the continued means to pay the money back you will be placed in a very troublesome situation. Sometimes the best way to deal with the pitfalls of unsecured lending is just not to borrow at all. It may make for a difficult situation, but it will be one without unpleasant letters and phone calls.

Secured Loans – The Pitfalls

Taking out a loan for a small amount to pay for a purchase that is just outside your usual spending power should be quite a manageable situation. If you take the loan out at a reasonable rate of interest over a decent term then you should be able to make the repayments even if you find yourself out of work for a period. However it is a different story if you take out a mortgage to pay for a house, or a car loan. These forms of credit are often “secured” on your purchase, which means that, should you default on the loan, the lender will be able to reclaim the property from you as a way of making their money back.

Secured credit has such pitfalls because, without the possibility of reclaiming their money in this way, banks would need to charge higher rates of interest and keep the term of the loan much shorter than they currently are. This would put the purchase of a house or a new car far outside the range of most people. It is, however, vitally important to be sure that you have a contingency plan should you suddenly lose your job. In such cases, becoming unemployed can also mean becoming homeless.

Further to this, a default on a mortgage can stay on your credit file for some time, meaning that another mortgage any time soon will be an impossibility for you. Take into account all the perils of taking a mortgage before you sign any documents, because the drawbacks to secured credit could be prohibitive.

Is Life Fantastic With Plastic?

We in society have become used to using plastic cards to pay for our purchases, because it promises convenience, speed and reassurance about our situation. While today we may not have the money to pay for that stereo or that holiday, a quick call to a bank can be all it takes to allow you to make the purchase one day and worry about paying it off in the future. When used correctly, credit cards can be beneficial for the user, as they allow a situation where you can control the cost of living. They are, it should be said, best used as a kind of progressive weapon against delays. The problem comes when one is used as a shield against debt. The thing they simply fail to offer is thinking time.

With a credit card, you can make a purchase and not have to worry about the money not being there. It is there, it just isn’t yours. As long as you can replenish that money within a suitable time period, no-one will get angry. However, there is no way of the vendor knowing that you will be in a bad position to actually pay for the purchase, and indeed they have no reason to care. It is the bank who will have something to say about it when you fail to make payments that they were expecting you to make. And the thing about that is that banks have a way of making their displeasure very clear indeed.

Can You Get Credit?

One thing that has been made very clear to people over the last few years is that taking out credit comes with some risks attached. If you are borrowing either on a credit card or a loan, it really is not advisable to borrow “as much as you can”, when the amount that you can borrow tends to be dictated by the bank or institution from which you borrow it. There is some link between your monthly income and your credit rating, and the amount that the banks will lend to you. However it does not seem to apply in the same way with all banks.

Most people who have worked in credit control will tell you of an account they saw which showed a customer defaulting on a credit card where their credit limit was pretty huge and their monthly salary was comparatively small. Due to the limitations of the process used to judge some bank’s credit limit provisions sometimes there will be excessive money lent to people who give in to the temptation to spend it even knowing that they cannot afford to pay it back.

Alternatively if you have not shown a good history of paying back credit when you get it, you run the risk of either not getting credit or getting it in woefully short amounts. Depending on your reasons for needing the credit in the first place this may not matter so much – indeed it may be good news – but it is still something to be aware of.