So, you decide to buy a house, a car, equipment for your farm or business. Will making this purchase with credit, a loan, improve your life or lead to financial ruin?
Credit is the ability to borrow money and pay it back later, and it is part of your financial power. It can help you get things you need now, like equipment for your business, based on your promise and credibility to pay it back. It is a critical part of financial education. People who are financially literate understand how they can access credit, how to avoid becoming over-indebted, and how to decide what financial products and services work best for their goals.
If you have good credit, you may be able to borrow more money at a lower rate. On the other hand, if you are a borrower who cannot make payments on time, you build “bad credit”. You may have to pay higher interest rates on the money you are able to borrow; in some cases, you may not be able to get a loan at all.
With good credit you may have more financial options available to you because you have more negotiating power. With bad credit your access to “good” loans are limited, especially in emergencies, which increases your exposure to predatory lenders—individuals or institutions who take advantage when the borrower doesn’t have many other options.
Borrowing money almost always costs money. You must be able to pay back the amount you borrowed, plus fees and interest, on time. So, before you decide to make a purchase using credit, do the hard work and ask yourself if that item is worth the extra expenses that come with taking on a loan.
Bad credit can be improved but it’s easier to build and maintain good credit than it is to fix bad credit. Turning bad credit into good credit may take many years of timely payments. Avoiding bad credit requires constant attention to payment due dates and carefully reading the fine print when you borrow money.
Carefully review the terms when you are considering borrowing money. Can you afford to make the payments? Are you willing to make payments for as long as is required to pay back the full amount due? Do you have collateral to put against your loan? What will happen if you default on the loan? Some loans can come with high interest rates, which make them difficult to pay back.
Weigh the cost of credit against the value of your purchases!