Using Credit Cards Instead of Small Loans to Pay Bills
Credit card companies and the recession
When it comes to bills, many people have been using small loans to fund them. The recession was difficult on many consumers. Finding ways to pay for monthly expenses was hard due to the out-of-control jobless rate, lending crash and inflated expenses. Though most people thought that credit cards would keep them out of financial difficulties, the lending crash took care of that.
Credit-card lenders quickly closed their doors when the economy took a downturn. People were left to manage on their own by using alternative methods of funding expenses. Now that the recession is over, credit is making a comeback but consumers are cautioned to be wiser about managing it. The credit card rules today are vastly different than they were pre-recession. To make it through the difficult financial economy, everyone needs to understand how the world of finance has changed.
Prior to the recession it wasn’t uncommon for consumers to spend more than they earned. People used credit for a wide variety of things they wanted, with little concern for repayment. When credit lenders changed their rules, or closed accounts altogether, people got scared. They suddenly realized that credit wasn’t the reliable option for paying bills that it once was. A study of the market shows that consumers need to change their way of thinking. Michael Silverman, economist for Baird and Friedman, stated, “Credit needs to be planned carefully based on a consumer’s priorities. If you see yourself buying a house in five years, then this is the time to start worrying about fixing your credit score, paying down debt and acting wisely with credit you already have now.” According to experts, the biggest caution when it comes to dealing with debt is to use forethought. Silverman added, “Gone are the days of using credit to buy whatever you want. In today’s world, credit needs to be used for one purpose: to create a positive credit history.”
Almost everyone has debt. Whether it is in the form of mortgage loan, automobile loan, credit card advance loan or other small loans, it is imperative to have a plan to tackle it. Budgeting is the number one way to manage. Every consumer should keep track of their expenses and income. They should know exactly how much left-over money they have at the end of every month. If there isn’t any, then that is an issue too. Silverman added, “Too many consumers live paycheck to paycheck despite the recession… the recession should have been a wakeup call for everyone.”
When it comes to installment debt, almost everyone needs it. To buy big-ticket items, most consumers need to use installment debt. For example, 30-year mortgage loans come with interest rates from about 5% to 7%. Automobile loans come with 8% to 9% loans. Everyday items need to be funded somehow and credit has been a life-saver for most Americans. The great thing about installment debt is that it is easily budgeted into daily life, and it has an end date. That end date is when the account is totally paid off and the asset purchased becomes owned-in-full by the borrower.
In the world of debt, there is also revolving debt. Revolving debt includes any “open-ended line of credit.” Visa, MasterCard, and department store credit cards. These are the worst type of credit because there is no end date and the interest rates can change. Of course there is legislation in place to thwart credit card companies from gouging consumers, but it still takes a vigilant eye to manage it. This is the type of credit that gets most people in trouble. It’s easy to over-charge and convenient to buy on credit, but there is a price to pay. Normally that price is anywhere from 10% to 35% in interest. For example, paying the minimum payment on a $3,500 credit card loan could mean making monthly interest payments for 15 or more years.
Credit in its best form
Although credit has its downside, there is still a great advantage to using it wisely. Managing credit makes it one of the best tools when it comes to funding big-ticket items like homes, cars, appliances and vacations. Rather than using small loans or savings, sometimes it makes sense to pull out a credit card. Credit shouldn’t be feared, but rather consumers should educate themselves on how it works, how to use it for their lives and how on-time payments should be a priority.