What is Buying on Credit?
Credit cards provide a certain level of flexibility when using them means managing your money the right way. Moreover, when you pay off your balance each month with consistency, they can be one of the most convenient options to buy things without dealing with hectic interests.
However, it’s crucial to note that when you purchase anything on credit, deciding to pay it off over time can also go the other way around. This is especially true when you are not aware of your current financial stability.
To be more specific, your purchases can cost you a massive interest rate and fees since it only grows with time when left unpaid. For example, suppose you buy something expensive using your credit card, thinking you can make monthly repayments from your savings account without a problem.
However, due to high interest rates, you could still mess up your whole financial balance and credit score history when you can’t, for some reason, make timely loan and debt payments every month.
Therefore, as simple as it may sound at times, buying on credit can be a means of financial destruction for you, especially when the potential negative results are not worth it. If that’s a scenario you could relate with, it’s imperative to know how to control your credit limit and get on the right side of the track immediately.
How “Buying On Credit” Works
A credit sale, also referred to as ‘hire purchase’ sometimes, is the term specifically used when you purchase something immediately but don’t pay for it until afterwards. That means you get to take the agreed-upon product with you while committing to pay for it in the form of timely installments. That’s also what differentiates this process from a “lay-by,” in which you have to pay a deposit to secure one or more articles for later ownership.
Moreover, when you buy things on credit, you may get the option to finance your purchase through the seller or an entirely separate financing organization. Not to mention, you also have to pay charged interest upon your purchase that you have to comply with every month. Considering the set-up fees and interest charges, you almost always end up paying for more than what you would have paid if you bought that item directly with cash.
Frequently Asked Questions About Buying On Credit
To help you save your time, efforts, and money, we’re sharing a detailed FAQ section in this article regarding the topic at hand. This way, you can make sound and hassle-free financial decisions for yourself in the long run without encountering any credit card payment issues later.
Case in point, here are a few questions to ask yourself before you decide to buy anything on credit in the future:
1. Do I Need the Item That I’m Using My Credit Cards for, Or Am I Buying On Impulse?
Since consumer credit (personal debt for purchasing goods and services) is often readily available to most individuals in the form of a credit card, it becomes destructively easier to buy anything online and in stores. We use the word “destructively” because, at times, this can do more damage to us than good. After all, when cash doesn’t change hands, it feels as if we are not spending real money. In short, everything becomes “too” simple. Hence, the convenience of credit cards lures us into making extravagant and outright foolish purchases.
To avoid such circumstances, it’s always best to keep the item secured in your cart for a couple of hours, especially when you’re buying things online, and get back to it with a fresh mind to re-evaluate your purchase. On the contrary, if you’re shopping physically, it’s always better to double-check the price tags and analyze them in terms of real dollars before spending money via credit card.
2. How Can I Get Approved for a Credit Sale?
Before finalizing a big credit purchase, the finance company ensures you are financially stable enough to afford the repayments despite the prominent interest rate.
For this, they look at the following parameters that you can ensure are issue-free before buying on credit:
- Your age (whether you’re older than eighteen)
- Your credit history
- Whether you owe money to any other lender, i.e. your bank
- Your current ability to make timely repayments on your income
3. If I Choose to Buy On Sale, Will the Money I Save Now Be More Than the Interest Charges I Would Be Paying By Buying On Credit?
When using your credit card to pay for any kind of merchandise, you can proficiently avoid a ton load of interest charge on it (“can” being the operative word). However, that only happens when you pay the balance in full before your next statement falls due. Instead, if you choose to take out a loan, the interest rate begins to pile up immediately.
Therefore, before you buy something on credit, you should make it a point to calculate the time it could take you to repay the total amount along with the interest costs. That way, you can determine what’s the best way to save money on your purchase. Finally, it’s best to keep in mind that if your interest charges surpass the savings from the on-sale price reduction, it’s wise to wait until you can afford to pay with cash instead.
4. If an Item is Costly, Will Paying with Cash for It Cut My Savings Account Too Deeply? Is It Better to Pay Interest On a Loan Instead?
The amount secured in your savings account can provide you with a cushion when you’re afflicted with financial emergencies out of the blue. In those times, paying for a high-priced item from your savings can be more costly to you than what you may have to borrow from a lender on credit and pay interest on it in terms of loans.
5- Is It Better to Wait Until I Have Saved Enough Money to Pay for an Item in Cash? Or, Will the Price Increase Substantially in the Meantime, Which I Can’t Afford?
Highly-priced items, including major home appliances, properties, and cars, tend to become more expensive every year. Hence, unless you are 100% sure you can save quickly, it might be in your interest to take out a loan instead and buy those items sooner rather than later. That said, buying on credit must only be considered when your budget allows you to accommodate loan repayment out of your current income and side earnings.
6- How Secure and Stable Will My Position Be, Financially Speaking, If I Decide to Make a Long-Term Credit Commitment?
For most individuals, a big-budget purchase, such as a house, is only possible by means of a mortgage system. It is a long-term commitment and a massive financial decision that you have to analyze deeply before going ahead with the prearranged, substantial payments every month.
Therefore, when determining the precise limit regarding how much you can afford to pay off each month, you have to ensure you will be left with some wiggle room afterwards as well. For example, suppose there’s a chance that your employment situation could potentially change for the worse, or your monthly income might reduce in the future. When that’s the case, you have to ask yourself whether you will be stable enough to meet your monthly payments adequately.
If the answer to this question is anything but a definite “yes!” it’s imperative you rethink your choices thoroughly. Using credit cards can indeed benefit you in many different ways. However, if you haven’t budgeted your loan, debt, and credit repayments carefully, it can lead to a massive financial strain. This could even get to the point where you may be unable to meet any of your payments.
7- What Should I Ensure When Making Costly Purchases On My Credit Card?
According to the Credit Contract and Consumer Finance Act, your lender (who’s charging you interest and fees) must be a business that legally provides credit, i.e. finance or a credit card company. The lender must also make sure you have the financial ability to afford the repayments afterwards.
When asking for high-cost loans, you should remember the following legal obligations between the lender and the payee:
- Lenders, under no circumstances, can ask you to return more than twice the amount of what you initially borrowed from them.
- Moreover, it’s illegal to charge compound interest on costly purchases.
- Lenders can’t ever charge you more than 0.8% of the outstanding loan balance in fees and interest per day when averaged across the loan term.
- Lastly, default fees for missed payments can’t cross the $30 boundary for payees.
As a side note, it’s crucial to keep in mind that until you’ve paid off your debt completely, the lenders can use their right to repossess your purchased item when you miss substantial payments.
Our Final Verdict
In conclusion, before using your credit card to buy anything, you should analyze and determine how much you can realistically afford at the moment. Moreover, suppose you keep struggling to pay on time even after creating a solid timeline. In that case, it’s best to let your lender know of your situation as soon as possible.
While you might not be able to save yourself from hitting a massive financial block even then, it’s also possible that a free financial mentor or a budget adviser may be able to talk to your lender on your behalf. When that’s the case, they can effectively help you develop a realistic budget and loan repayment plan, explicitly based on your monthly income, savings account history, and living costs.