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Financing Purchases - Cash or Credit

When thinking about expenses - whether it is for everyday items like soap, or a major purchase, such as a car - it is helpful to determine the advantages and disadvantages of paying with cash or credit.

Paying by Cash:

PROS

  • The item is fully paid for
  • No interest fee will accrue
  • Will only buy what can afford at that time

CONS

  • Possible safety issue if carrying large amount of money and cash is stolen
  • More risk if money is lost or stolen - if using credit card the liability for unauthorized us of the card is $50 when credit card company is notified of loss or theft
  • Credit Rating is not improved
  • Inconvenience of carrying and getting money

Paying by Credit:

PROS

  • Way to establish a good credit rating - if payments are always paid on time
  • Safety and convenience - not necessary to carry large amount of cash for major purchase
  • No interest fees if bill is paid in full
  • Can purchase item immediately and use it with the credit card company’s money until bill is sent

CONS

  • High interest charges on unpaid balance
  • May charge more than can afford

To avoid incurring interest fees, it is wise to not charge more than can be paid for each month. For some people, using credit helps them track expenses easily. For others, a credit card lures them into believing, "I really want that item. I can afford it" and they don't think it through carefully. Then, they are surprised when the bill comes due and they don't have enough money to pay it in full.

Before using credit, ask:

  • Do I have self control?
  • Will I stick to my budget?
  • Do I intend to pay off credit cards in full each month?

Try This Exercise:

Think of a purchase you would like to make by credit. Use this calculator and fill in:

  • Credit card interest rate
  • Amount of purchase
  • Choose different amounts to pay each month to learn how much the interest would be and how many months it would take to pay off the purchase

Seeing the interest that would accrue if the purchase couldn't be paid in full may help determine if it is worthwhile to buy the item using credit or wait until sufficient cash is available.

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