Pros and Cons of Paying on Credit Terms
Pros and Cons of Paying on Credit Terms
Throughout the different phases in life, we may need to make big and impactful purchases. If we don’t have sufficient cash on hand, we will have to apply for credit to finance the purchase.
With rising inflation and interest rates, many would have to make adjustments to their financial plans to tide through increasing prices for goods and services.
This article will give you better insights of what is credit and how you can use it to manage your cash flow and finances.
What is Credit?
In simple terms, credit becomes a debt that you will need to repay eventually. Credit providers like banks and financial institutions (FIs) will evaluate a borrower’s repayment capacity before deciding how much money the lender is willing to extend out to the borrower. Credit providers will tend to consider certain factors such as the borrower’s risk profile and annual income before they decide on the amount of loan to disburse or the amount of credit to assign.
Credit facilities can be generically classified into Unsecured and Secured credit lending. Some of the commonly available unsecured credit facilities are Credit Cards, Overdrafts and Personal Loans.
On the other hand, secured credit facilities will usually require the applicant to pledge a collateral in order for the credit facility to be granted. Some of the common examples are housing loan, fixed deposit, and vehicle loans. These loans are usually disbursed in a lump sum and repaid in fixed monthly instalments over a period of time.
Upside to Using Credit
Being able to use credit can come in very handy when you are in need to pay for a large purchase and you do not have sufficient cash on hand to pay up immediately. For instance, you can take up personal loans to pay off your school fees, medical bills and even for a house purchase. Different credit providers will be able to offer a range of products with interest rates depending on the repayment period and allow individuals to pay for their purchases in manageable monthly instalments.
Downside to Using Credit
The use of credit comes with terms and conditions which borrowers must comply with. For example, if a borrower fails to pay up the outstanding amount before the due date, credit providers can levy penalties such as late charges or additional interest.
If borrowers are unable to repay what they owe, they might eventually end up with a debt crisis on their hands. Individuals who are not disciplined in managing their finances might become delinquent in their payments and this will be seen as having a negative impact on their credit report.
Consequences of Excessive Credit Use
Credit providers use the credit report provided by Credit Bureau Singapore (CBS) to conduct credit assessment of potential borrowers.
A credit report is a comprehensive record of an individual’s credit payment history compiled from different retail banks and major financial institutions. CBS collects such credit data from the contributing members in this list. A credit report will display all credit-related data of the individual, displaying vital information such as the total credit limit disbursed, the types of credit or loan facilities applied, the amount of overdue balances that the individual owes and even public information like litigation charges and bankruptcy proceedings.
Credit providers review the report and evaluate the likelihood of the individual repaying before extending a loan out to him/her. This helps the lender to mitigate the risks of borrowers defaulting future payments.
The consequences to having a poor credit report can be dire especially if you are planning to make very important life-changing decisions such as moving into a new house, paying for education fees or even starting up a new business. You will have to seek for other alternative means to look for additional funds which might also mean that you will have to consider re-planning your finances, possibly delaying your future goals or even building your wealth.
What Does My Credit Report Says About Me?
To check your credit score, you can purchase a copy of your credit report from Credit Bureau Singapore.
For a detailed explanation of a credit report, you can view a sample credit report with explanatory notes here.
If you are facing increasing difficulties servicing payments to your credit cards or other unsecured credit facilities, consider attending our weekly Debt Management talks (conducted both over Zoom and in-person at our office), where you will learn more about what to do, when and how to communicate with creditors, what are the common collection actions creditors can take, what are the various debt settlement options are and what is the CCS Debt Management Programme. Click here for schedule.
After attending the talk, you can submit a request for one-to-one credit counselling. Details on the counselling session and instructions on how to arrange for an appointment will be explained during the talk.
Published 23 December 2022.