Consumer Credit…its Uses and Misuses

Since its inception in the mid-20th century, consumer credit has exploded in personal use over the last two decades. The use of credit to purchase goods and services have allowed consumers from all walks of life, and perhaps many different social strata, to become more efficient and productive, increasing the overall quality of life for millions of hardworking Americans. In quite contrast, the misuse of credit has cause millions of Americans great financial hardship over the years. Much to the detriment of the credit industry, the average U.S. consumer now carries an average debt load of $15779, according to the Federal Reserve Bank. Credit use equals debt. And for those select few consumers who pride themselves on being financially prudent, knowing “when and where to use credit” is vital to avoiding the pitfalls of consumer debt. The following list below highlights both good and bad uses of consumer credit:

Using Student Loans to Purchase Job Skills

Whenever a loan is taken out for the purpose of education, the resulting debt becomes an extension of ones investment in human capital, which is the knowledge, skills, and experience that make an individual more productive, thereby earning him or her higher income over a lifetime. A Student loan is considered, by far, a good use of consumer credit for this very same reason: the resulting debt tend to fall in line with an individual’s long-term investment goals, thus enabling him or her to obtain a higher salary in the job market.

Using a Mortgage Loan to Create Wealth

Exactly what is the American Dream? For millions of Americans, attaining the American Dream has largely become the acme of one’s professional career. Economically speaking, a house is considered to be the largest consumer good an individual can purchase, and thus normally requires the use of borrowed funds (i.e., a mortgage loan) in order to make it a reality. Who pays all cash for a house? Very few...you would imagine. For this very same reason, a mortgage loan has primarily been considered a good use of consumer credit. Theoretically, what it does is act as a financial conduit between borrowers of limited funds and lenders of excess funds, driving millions of American households towards home ownership and into the arena of personal wealth creation.

Using Credit Cards to Destroy Wealth

Put simply, credit card debt destroys wealth. In fact, the perils of overusing consumer credit cards can bring about the kinds of financial consequences that can wreak havoc onto your personal finances. Needless to say, using credit cards to purchase frivolous consumer product and services, including high priced retail items, fancy dinners and extravagant traveling packages, can create the kinds of debt loads that impede individuals from attaining any kinds of savings, destroying your personal wealth in the process. Savings equal wealth. And for the millions of hardworking Americans, striving today to create the kind of wealth for tomorrow’s use, conventional wisdom posits “staying as far away from credit cards as possible.”

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