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Financial Products Series: Credit



The Financial Products series, to briefly explain and evaluate a wide variety of financial products/ This series should be useful to anyone who wants to gain a brief knowledge of different financial products.


This article is the twelfth in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:
  1. Shares
  2. Structured Products
  3. Cash
  4. Current Accounts
  5. Savings Accounts
  6. Annuities
  7. Certificate of deposit
  8. Options
  9. Treasury Bills
  10. Bonds
  11. Tracker funds
  12. Credit
If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Credit

Picture from freedigitalphotos.net
Credit is a less obvious, more unusual form of financial product. Credit is an agreement between two parties, where one party provides finance to the other party under the agreement that the second will eventually repay the first the full amount with interest.

There are various methods of gaining credit. These can be through a credit card, personal loan, overdraft facility, mortgage, buying something 'on credit', payday loans, or borrowing off a friend.

I include credit as a financial product as it is the main form of financing for many people in the UK today. It is the case that when some people want money they look for income in the long term through investments. When other people want money they only want it now. This means that if that particular person wanted a new car, but didn't have the money then they would buy it on credit through a contract with the dealer or on a credit card.

Credit cards charge a variety of interest for the privilege of borrowing money based on your credit rating. Typical APR (Annual Percentage Rate) can range from as low as 6.95% ranging up to 45% (a quick comparison was taken on 06/07/12 and so things may have changed since then).

Advantage

Disadvantages

  • You pay interest on the credit taken out with that particular economic agent
  • It is not an investment by any means

Overall conclusion

Sometimes a credit card it useful. However for the majority of people credit is a financial product used to get things now that they would otherwise have to wait for. In general these are not beneficial financial products as they do little in the way of building wealth.

Score: 2

Advice: Never ever invest on credit. That is just stupid. Only invest what you can afford to lose. Only use credit where absolutely NECESSARY. In fact I would add that a person should try to lead a life whereby they use as little debt as possible.

Readers, what are your feelings on taking on debt in general? Do any of you believe that I should be more willing to take on debt or do you agree with me and find debt to be quite evil!?



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