Before you can understand when and how to use credit you need to know exactly what credit is, so let's start with a definition.
Debt (credit) is a lien you place against your future earnings. This definition is a little different from what most people are used to so let's look at the following illustration:
Let's say you are going to buy a new television. The set cost $800, but you don't have that much extra cash right now so you decide to put the set on credit at 21%, and you want to pay it off in 12 months. (Most finance companies will charge you 24% to 30% but lets assume you use a credit card) Your monthly payment will be $74.49. Now that does not seem that bad until you look at what this does to your budget. Assume that you allocate $300 a month for discretionary income (spending money, mad money, whatever you call it). For the next 12 months you will only have $225.51 available for discretionary use, you have spent your future earnings. Let's use percentages to further illustrate the example. The monthly payment represents nearly 25% of your discretionary income for the next 12 months.
If this were going to be your only debt and you were comfortable with the situation then it may be a sound financial decision to use credit to by the television. The point is debt is a tool. When used wisely it can be very beneficial, but when over used it can put you in financial jeopardy.
Other Books In the Library
Main Library Page <> Down Payment Stratagies <> Chart of Interest Rates <> Questions To Ask A Lender <> What Are Lenders Looking For? <> Why Buy A Home <> VA Loans <> FHA Loans <> Settlement Cost Handbook <> 3 Things To Avoid <> How To Get Out Of Debt <> Understanding How To Use Credit <> Credit Repair <> Appraisals <> Title Insurance <> Credit Scores <> Automated Underwriting <>