Financial Considerations

Financing Purchases

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.

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.

PROsThe item is fully paid for
No interest fee will accrue
Will only buy what can afford at that time
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
CONsPossible 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
High interest charges on unpaid balance
May charge more than can afford

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.

Additional Resources:

For additional calculators and resources related to managing your finances, check out these links: