Borrow money responsibly: Installment loans versus credit cards
Credit card companies make it hard, on purpose, for consumers to understand how much money their credit cards are really costing them. Credit cards offer a lot of freedom on the surface. But often, the easier it is to get a credit card, the harder it is to pay off the credit card debt. If you need money now, you’ll be glad later if you borrow money responsibly. Borrowing responsibly involves the wise use of alternative forms of financing, such as installment loans, a short-term loan or guaranteed loan.
Credit card confusion
It’s no secret that credit cards have drawn millions of people who need cash today into an endless struggle with debt management. Complex terms and fees hidden behind fees make it very hard for average people to understand that they are actually taking out loans. Most people who need a loan wouldn’t choose a money lender who wasn’t up front with how much they are actually borrowing, what the interest rate is and how long it’s going to take to pay off the debt.
With responsible borrowing, credit cards aren’t necessarily a bad thing. When credit cards are the only thing, they can cause problems. Credit cards bring many benefits–as long as credit cards aren’t the only thing you use to manage money and debt.
Credit cards: small loans are big loans
Responsible borrowing is thinking differently. Charging everything on a card and getting by with the minimum payment makes whatever you buy with a credit card more expensive every day. Imagine buying a pair of shoes for $99.95 with your credit card. That amount goes into your balance and increases the interest you pay on your account. Your minimum payment mostly goes toward interest, because that’s how the credit card company makes its money. The credit card company doesn’t want you to pay off your balance. As long as you make your minimum payment, you will never pay off your balance and the credit card company will be making money off you forever.
Keeping a small loan small
To borrow responsibly, pay for things differently. Use an account for everyday spending that is paid in full. Have another one handy if you ever need to finance an emergency, or more expensive necessities. A good example of an account to pay in full is American Express. Use your American Express for groceries, gas, phone bills, utilities, etc. Every charge on your statement adds up to the minimum payment you pay each month. Using a card you pay in full every month is a very convenient way to spend money, manage debt and build a strong credit history.
Responsible borrowing also includes using other types of credit, like an installment loan, when you need a small loan for unexpected expenses — like a crown at the dentist, a medical bill from a minor emergency or getting your car fixed. Getting an installment loan is a lot smarter than paying the mechanic with a revolving credit card account, adding that amount to the balance and simply feeding the interest dragon with a minimum payment.
To borrow a small loan responsibly in an unexpected situation, use the credit card account that is paid in full at the end of the month at the mechanic’s garage. Then get an installment loan to pay that credit card bill when the next payment–in full–is due. With your installment loan, you will know exactly how much you are borrowing, what the interest rate is and how long it’s going to take to pay it off — in full.
Good, common sense
Think about it. You would never take out a car loan with no repayment schedule and make payments on it forever, long after the car ends up in the junk yard. But irresponsible borrowing with credit cards for stuff like big screen TVs, new tires or expensive toys is exactly that. Small installment loans or a short term loan is just good, common sense.