The golden rule for using credit wisely

 In Advice

There is one golden rule when it comes to using credit that borrowers should understand. The usage of credit is just as important as where you get your loan from.

Once you have received credit you may be confronted with many options on how to use that money. Be careful when considering the ways you will spend your money, before you know it your money could be gone and it may feel like all you are left with is the monthly repayment.

There are two types of credit, namely consumption and development credit. It’s important to distinguish between these two types of credit. Consumption credit is borrowed money used to purchase items that are non-durable or used up. These are items such as clothes, food, transport, household items, furniture and the likes. These items generally don’t make you more money in the future.

Development credit is borrowed money used to fund activities that are considered an investment that produce value in the future. These are activities such as funding education, purchasing a house, making home improvements, investing into a business and buying shares. By spending your borrowed money on these activities, you will generally make a return or money on them into the future. For instance, by taking a loan to studying further, once you graduate you will be able to secure a higher paying job. Or improving your house will make it more valuable when you are ready to sell it. Or starting a business can bring in extra income.

Essentially using credit on consumption items generally costs you more than using the same credit to purchase development activities. Try using your borrowed money to fund further education, improve your house, buy a house or start a business so that you could make more money in the future.

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