Pros & Cons of Consumer Debt

Credit can be a valuable tool, even though it means going into debt. For businesses, it means having the resources to take advantage of opportunities in order to create income. Consumer credit is more than often used to purchase merchandise that depreciates or loses value over time. This is a poor use of debt. The only exception would be a home mortgage, as real estate is expected to outperform the costs of the mortgage. However, for emergencies or large purchases, consumers are often willing to enter into a long-term credit agreements for repayment. There are pros and cons to consumer debt that everyone should consider.

Buying on Credit

Pro: The reason for having credit is to make purchases at a convenient time and the payments at a later date. For purchases that are necessary and planned, credit becomes a tool to take advantage of special pricing from retailers. For emergencies, debt can provide a number of benefits to obtain what is immediately needed. An example would be a new set of tires in the event of damage, so a person can continue to get back and forth to work.

Con: Unfortunately for the undisciplined, purchasing with consumer credit primarily occurs as the result of emotional spending, not planned spending. Purchases seldom are that good of a deal to outweigh the long-term costs of buying on credit.

Monthly Payments

Pro: Scheduled regular monthly payments can make budgeting and bill paying easier. When a consumer is able to spread the payments over time for a large purchase, a person is better able to manage finances.

Con: Monthly payments quickly add up. What was thought to be a simple $30 per month payment soon becomes unmanageable at $90 or more when other items are added to the credit account or additional accounts. It's not long before most individuals find themselves juggling more than just the payments from consumer debt.

Credit Reporting

Pro: Purchasing with consumer credit usually results in reporting to credit monitoring agencies. When payments are made on time, or the balance remains far below the actual credit limits, a consumer will receive favorable scores on their reports.

Con: Failure to make payments within time periods allotted by each lender will result in negative reporting to credit monitoring agencies. If a consumer fails to make even one payment on time, other lenders may reserve the right to raise interest rates on their credit cards. Also, if the overall debt is more than half of the credit limit for each account, a consumer's credit score may be lowered.