Debt and instant credit are part of our everyday lives. Most of us borrow to pay for our cars and houses, and nearly everyone has at least one credit card. But the convenience of credit can easily entice you to spend more than you earn. Knowing when and when not to use credit -- and what type of credit to use -- can help you avoid getting in over your head.
There are two major types of household debt: installment and revolving credit. Installment debt is paid off in a specified period of time by making predetermined payments periodically; conventional mortgages are the best example. Revolving credit is a line of credit that is instantly available, usually through use of a credit card. As you pay down your debt in a revolving line of credit, the minimum payment is also reduced, thus extending your payoff period and the interest you pay.
Installment debt is excellent for big-ticket purchases and is easily budgeted. And, compared with revolving credit, interest rates are usually relatively low. Revolving credit, however, usually carries higher interest rates. While credit cards are an extremely convenient way to buy virtually anything at any time, you need to use them intelligently and be aware of the interest costs.