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What are reasons for and against using credit?

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When it is used wisely, credit can offer some important advantages. For example:
  • Some kinds of credit – like credit cards – make it easier to shop. You don’t have to carry cash with you. All you have to do is pay your bill by the due date.
  • Other kinds of credit – like loans and mortgages – can help us make major life purchases far sooner than we could through savings. Few people these days pay cash when they buy a car or a home.
  • Sometimes people use credit to invest in the future. They borrow money to contribute to their Registered Retirement Savings Plan, for example. Or to get more education.
What are reasons NOT to borrow?
  • It costs a lot to borrow. When you get a mortgage or a loan, you have to pay back the amount you borrowed, plus interest. That means you pay more for an item using borrowed money than you do when using your own money. When you use a credit card, if you don’t pay back the full amount you owe each month, you will pay interest on the amount that remains unpaid. Here again, that means you will end up paying the original price for a restaurant meal or a pair of shoes, plus the interest charges on those purchases until your card is paid off. 
  • You may buy things you really can’t afford. Let’s say you don’t have the money to pay cash for a new TV. You buy it using a credit card. The next month, you still don’t have the cash to pay off what you owe for the TV. Or the next month, or the next. It could take years before you ever pay it back. And if you do this with other things, you could soon have a huge amount of debt. 
  • You can get a bad credit rating. If you borrow too much and you don’t pay it back, the bank won’t let you borrow any more money. If something comes up and you really need financial help, you may not get it.
Before using loans or credit cards, think carefully about these advantages and disadvantages. Using a loan to pay for your education can often be a wise use of credit. Likewise, becoming a homeowner may be smarter than renting. Using a credit card to buy things you can’t afford is never a wise use of credit and can often lead to serious problems.
 
The Canadian Bankers Association web site has a list of questions to ask yourself before deciding to make a purchase using credit. You can also learn more about the dangers of borrowing from the Ontario Securities Commission web site for Investor Education.


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Here are some related link(s):
[1] Understanding Credit – Bank of America This web site explains the value of credit and the implications it has for you.

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[1] What are reasons for and against using credit?

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