Buying on Credit: Meaning, Benefits & Drawbacks

Buying on Credit: Consider This First

You might be looking to buy a new laptop or a costly accessory that you always wished. The shop have offered you to buy on credit, which makes you tempted to follow through with their proposition. However, before you're do that you should probably know what buying on credit means, as well as the drawbacks and potential advantages of it. Only then can you make an informed decision on the matter, which will benefit you the most in the long run.

buying with credit cards
Image by Steve Buissinne from Pixabay

What Does Buying On Credit Mean? 

The expression 'buying on credit' means that you're purchasing something through financing, i.e. through a loan or using a credit card (which is where the expression originates from). By financing a purchase, the person 'buying on credit' is obliged to pay for the product or service over a set period of time, usually with an added fee or percentage of interest. This is just convoluted way of saying that it's a loan.

On the other hand, the opposite of buying on credit is to pay in full, which means to immediately paying the complete amount for an item upon purchasing it. 

What Are the Benefits And Drawbacks of Buying On Credit

There are both advantages and disadvantages for buying on credit, although rationally the drawbacks heavily outweigh the benefits.

Benefits of Buying On Credit

The benefits of financing a purchase is that you can instantly access the item or service you wish for. Sometimes you can leverage this to your advantage, i.e. as an investment for your future. Let say pay for a costly programming course, which in return lands you a better paying job. That's good, and might ultimately give you a return on your investment, both financially and emotionally. 

There is another benefit if we're talking about buying on credit using credit card debt. First and foremost it might increase your credit score, which in itself means lower rates on insurances and decreased interest rates on loans. In addition, it might earn you rewards and cash-back, which actually saves you money if you use it responsibly. 

Moreover it can provide purchase and travel insurances, which are most certainly good-to-haves in case of scams. Hence you shouldn't be scared of using credit cards, but you should be cautious of how you use them.

Drawback of Buying On Credit

The main drawback is that you're buying something you might not afford, especially if you're not calculating your finances in advance and know precisely what your monthly budget tolerates. In addition, you are generally paying more when buying on credit, since there's often an fee or interest rate attached to the financing.

Consequently, this might both strain you monetarily, as well as being damaging to your mental health. There are ways to reduce stress from debt, but also consider that money doesn't buy happiness and purchasing a new phone or couch doesn't lead to better well-being over a longer period of time. 

Conclusion

Buying on credit means financing your purchase as opposed to paying in full. Psychologically it feels good to immediately get what you want. But remember, this is your brain succumbing to instant gratification. 

Therefor do not buy anything on credit unless you the purchase is necessary for your survival or offers some sort of leverage to pay itself back in the future, e.g. a course bolstering your professional skills, making you more attractive on the job market. Under those circumstances it may count as an investment. Buying on credit may also be used responsibly to increase your credit score. 

In conclusion, avoid buying on credit unless you're convinced that you'll be able to quickly pay back the credit card debt. Following this simple rule will most likely be a victory for both your wallet, sanity and credit score. 

Sign up for free and receive invaluable advice about the psychology behind successful investments 📚 💰

Popular Posts

Therapy When You Have No Money: Coping with Life's Challenges on a Budget

Image
Therapy When You Have No Money Life can be tough, and we all face challenges that can leave us feeling overwhelmed, anxious, or even depressed. In an ideal world, we'd have the means to seek professional therapy to help us navigate these rough waters.  However, when finances are tight, and the prospect of affording therapy seems like a distant dream, what can you do?  This the though reality of an increasing amount of individuals, especially with the worsened financial climate. This InvestorsPsychology attempts to provide some alternatives for therapy on a budget. Photo by Towfiqu barbhuiya at Pexels.com Seeking Support on a Tight Budget One of the most important steps in bolstering and protecting your mental health is making sure to talk to someone about your problems.  Speaking to others not only eases the emotional burden of your struggles, but also forces you to reflect and gain valuable perspective, which is a vital component in recovery from poor mental health. Be...
Read more

Stock Market Psychology: Use it To Your Advantage

Image
Stock Market Cycles Chart Stock Market Psychology Grasping the stock market psychology is not too hard, but many investors are unaware of its existence or thoughtlessly neglect it while planning their investment strategies.  For long it was thought that the stock market must act rationally and sooner or later correct itself. Some investors still hold onto this belief, which is known as the " efficient market hypothesis ".  However, in modern times market psychology has been prone to more in-depth research. Nobel prize-winning Daniel Kahneman was one of the first economic researchers to doubt the validity of the efficient market hypothesis. Together with the famous cognitive and mathematical psychologist Amos Tversky they challenged the notion that the markets would always make rational decisions made on relevant and publicly available information. They made the case that humans suffer from a palpable cognitive bias when it comes to financial decision-making and specifically ...
Read more

Market Cycle Psychology: What You Need to Know

Image
Market Cycle Psychology Market cycle psychology is an interesting phenomenon. The price trend in different markets tend to follow certain patterns (whether it's stocks, commodities, housing, or cryptocurrencies). This holds especially true in a so-called market bubble . Market cycle psychology is not an exact science but can roughly be explained by the nature of human psychology in relation to fear and euphoria, as well as collective thinking .  Fear and euphoria play an important role in investors psychology in general.  Fear of regret , for example, is a well-known concept that refers to the human mind anticipating regret and subsequently avoiding it. The infamous FOMO, also known as fear of missing out , is strongly dictated by fear of regret. Strengths and Shortfalls of Market Cycle Psychology Understanding the concept of market cycle psychology can be beneficial on a macro scale when determining in what strategic direction you want to take your investments. Knowing in wh...
Read more